The ACM Journal 2012 Q1

After a rocky 2011, the capital markets started with a bang in the first quarter of 2012 . The S&P 500 earned its largest gain since 1998, rising 12.6% in just three months. Other segments of the stock market were similarly strong, with mid-cap and small-cap stocks both gaining well over 10%.

International Rebound
The comeback story of the quarter was international and emerging markets equities, which gained 10.9% and 14.1%, respectively. The big gains, both in the U.S. and abroad, were due in large part to a settlement (at least for now) of the Greek debt crisis, which had been a persistent weight on the global capital markets. Greece and creditors finally agreed to a restructuring deal in early March. The stock market rallied on the optimistic Greek news leading up to and after the deal, resulting in an uncharacteristically ebullient stock market throughout the first quarter.

Economic Growth Improving
In addition to the positive news from across the pond, improvements in domestic economic data aided the stock market rally as well. Unemployment claims dropped steadily, and the housing market continued to pick up steam. While the U.S. still has a way to climb in terms of the jobs and housing markets, positive trends are developing. Moreover, the Federal Reserve announced early in the year that it expects to keep interest rates at their current low levels through 2014. This decision means that money will remain cheap for borrowers over the next couple of years, and bond prices will likely remain at high levels. While that isn’t great news for fixed-income investors, it is a good sign for the economy, as corporations should have ready access to low-cost cash to provide future earnings growth.

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