Is March The Cruelest Month?

Happy March 1st, everyone.  Although the calendar indicates it's late winter, it definitely feels like spring in the Carolinas.  The unusually warm weather brought last night's thunderstorms but they've blown over and today will be seasonably perfect, with Carolina Blue sky and a temperature of about 60.  I'm not sure what the rest of March will be like but today looks to be terrific.

The calm, cool morning and severe clear sky this morning started me thinking about analogies to the economy and investment markets.  I know--I'm weird that way.

Is this the calm between the storms of winter and spring?  Are our improving economy and recent successes of the stock markets merely a calm before we enter another stormy season?  Let's take a look at what's happening.

As of the end of February 2011, The S&P 500 stock index is plus 4.4% YTD and plus 20.5% over the trailing six months.  Since hitting bottom two years ago in March 2009, the index has risen over 96%.  Wow!  That's really, really good but the sad truth is the index is still about 15% below it's peak in October of 2007.  Bummer.

Will the markets and our portfolios ever make it back to where they were?  Surely they will.  How soon?  That's the question for which I don't have an answer.

Can equities keep up the blistering pace they've set over the past two years?  Unfortunately, that is not likely.

Will we see a continued upward trend in the equity markets?  It is not improbable that we will.

Why?  It's still the only game in town--almost.  I'll get back to that "almost" later.

Real estate values are still in the tank and they don't seem to have found the bottom.  Interest rates on money market accounts and deposits are virtually nil and bonds, government or corporate, remain at historic lows.  What's even worse in the bond market is that rates and yields poised to go higher relatively soon make buying bonds, now, a risky choice.

If you're sitting on a pile of cash, as many fund managers and big-time investors are, where can you put it?  Stocks, of course, which, together with pretty solid corporate results, are driving stock prices higher.  That is likely to continue, albeit at a slower pace, for the remainder of the year.

Will all markets and the equities traded on them rise uniformly?  Not in the short term.  I still believe strongly in broad diversification, including developed and developing international markets, but in the short term the US market is likely to outperform its international counterparts, especially the developing world.

Should you sell all of your international equity holdings and buy a S&P 500 Index fund?  Probably not.  However, it makes a lot of sense tactically to trim positions in international holdings and reposition them in the US markets.

Isn't there anywhere else to invest?  Well, remember that "almost" from a couple of paragraphs ago?  The alternative for many investors has been commodities.  Over the past six months, the Dow Jones UBS Commodity Index, representative of a broad range of various commodities, is up a whopping 24.2%.  That surpasses even the strong gains stocks have posted during the same period.  What's more, commodities, including oil, copper, gold, cotton and corn, are likely to go higher.

So, should you sell your stocks and buy commodities?  Should you get rid of your S&P 500 Index fund and buy pork bellies?  Probably not.  However, it makes a lot of sense to add or increase commodities exposure to portfolios.

Are there storm clouds on the horizon?  Aren't there always?  Among them are the political and economic turmoil in the Middle East and the looming debt crisis, with all of its ramifications, at home.  These are very serious issues and worthy of our serious attention but, at least for now, let's hope they'll blow over, as last night's thunderstorms did.