The major global stock market indices had a terrific first quarter, one of the best in a long time, as global risks appear to be abating. It’s a stark contrast to last year’s market, when bonds were the place to be rather than equities. Below we review performance, the major economic drivers, and our outlook and positioning for your portfolio.

– Peter Lowden, CFA

Market Review

Stocks surged in the first quarter of 2012, continuing the strong run that began in the fourth quarter of last year. In each of the past two quarters, domestic stocks gained about 12%, marking one of the strongest runs over the October–March span going back to the 1920s. Emerging-markets stocks gained 14%, and small-cap U.S. stocks were up 12%.

In contrast, the core investment-grade bond index is flat on the year, as bond prices have declined and yields have increased. After bouncing around below the 2% level for much of the first quarter, the yield on the benchmark 10-year Treasury popped higher in mid-March, closing at 2.39%. High-yield bonds rose 5%, and emerging-markets local-currency bonds added 8%.

As would be expected in such a positive investment environment, stock market volatility has subsided. The Chicago Board Options Exchange Volatility Index, or VIX, is a commonly used indicator of market volatility. Often referred to as the “fear index” it is a measure of

The major U.S. market indices avoided a downturn in 2011 after two strong recovery years. Those who bailed out after the market took any of its many tumbles would have risked missing the year’s many improbable, unpredictable recoveries. 2011 proved to be a microcosm example of this odd-but-important investing lesson of staying invested. Below we review 2011’s performance, the major economic drivers, and our outlook and positioning for the New Year.

– Peter Lowden, CFA

Market Review
Remarkably, after all of the volatility witnessed throughout 2011, the S&P 500 index ended the year exactly where it started, with its 2% return coming from dividends. Smaller- and mid-cap stocks closed the year down 4.2% and 1.7%, respectively, despite also posting double-digit fourth-quarter gains.

The turmoil in Europe dragged foreign stocks down 11.8%, based on the MSCI World ex USA Index. Continued concern over global growth along with periodic flights to quality drove emerging-markets equities sharply lower; they ended 2011 down 18.8%.

High-quality bonds were on the other side of the risk-on/risk-off volatility, with sharp flight-to-safety rallies that helped net the Vanguard Total Bond Market Index a 7.6% full-year gain. International bonds returned 6.3% in 2011, while emerging-markets bonds, which are perceived as riskier, lost 1.7%. Floating-rate loans finished the year up 1.5%.