Financial Market & Economic Overview
Asset Allocation Team
Edge Asset Management, Inc.
Economic Review and Outlook
December 2010
1Q Story: International Events
International events dominated news on nearly all fronts during the first quarter of 2011. From Japan to the Middle East, from North Africa to the Eurozone, the gravity of these events had the potential to rock both international and domestic markets. Yet stock markets proved resilient, ending the quarter with solid gains.
In perhaps the quarter's biggest event, Japan was struck by a massive 8.9 earthquake on March 11, causing a devastating tsunami and ongoing nuclear crisis in that country. Japan's stock market plummeted following the disasters as investors gauged the impact on Japan's infrastructure and economy. Japan's stock market ended the quarter down 5.3%, weighing on the MSCI EAFE Index1.
Meanwhile, geopolitical turmoil raged in the Middle East and North Africa as citizens in multiple countries rebelled against long-standing leaders and demanded regime changes. Rebels in Egypt and Tunisia succeeded in ousting their presidents; attempts to do the same in Libya and Yemen had not succeeded as of quarter-end. In Libya, NATO forces declared a no-fly zone and initiated attacks in late March. The region's instability drove up oil prices, which closed above $106/barrel on March 31 (a year-to-date increase of nearly 17%).2
In the Eurozone, economic concerns continued unabated during the quarter. Following a failed vote to implement budget cuts and austerity measures, Portugal's prime minister resigned, which pushed the struggling country closer to a bailout (following in the footsteps of Ireland and Greece, which sought aid last year). In Ireland, banks moved toward nationalization after the government uncovered a 24 billion euro shortfall during a new round of bank stress tests.
In the U.S., Recovery Continues
Although overshadowed by events elsewhere in the world, data released during the first quarter showed a slowly recovering U.S. economy:
- GDP grew at an annual rate of 3.1% in the fourth quarter of 2010 (up from a 2.6% rate the prior quarter)3 as consumer spending reached its highest point since the fourth quarter of 2006, and corporate profits rose to $38.2 billion from $26.0 billion the prior quarter.4
- The Conference Board Leading Economic Index increased by 0.8% in February, pointing to an economic expansion expected to gain momentum in the near term.5
- The labor market showed modest improvement. Non-farm payrolls increased by 192,000 in February, and the unemployment rate was 8.9%.6 Also, the four-week moving average of seasonally adjusted initial unemployment claims declined through most of the quarter.7
However, the housing market continued to drag on the economy. Although affordability remained high due to still-low interest rates, the residential housing market remained in decline. New-home sales dropped nearly 17% month-over-month in February to an annualized pace of 250,000 units (an all-time low), and were down 28% year-over-year.8 Home prices also were down. Year-over-year prices fell 3.1% in January, which was the fifth consecutive month of declines.9
Looking Ahead
Following a resilient quarter for financial markets, going forward we expect reflation in developed countries, rising inflation in emerging markets (with central banks raising interest rates as a result), and stronger growth accompanied by higher rates in developed markets. Also, risk has risen over the quarter and must be taken into consideration. Ongoing conflicts in oil-producing regions and a falling dollar due to Federal Reserve easing could result in oil prices rising even higher; oil prices much above current levels would start to dampen the economic expansion.10
1 MSCI family of indices.
2 FactSet WTI Crude Oil.
3 U.S. Bureau of Economic Analysis, March 25, 2011 news release; www.bea.gov.
4 On the Other Hand: Economic Insights, March 21–25, 2011 edition, by Randy Mundt and the Principal Global Investors Economic Committee.
5 March 17, 2011 press release; www.conference-board.org.
6 March 4, 2011 press release; www.bls.gov.
7Seasonally adjusted initial unemployment claims, U.S. Dept of Labor; www.dol.gov.
8 U.S. Census Bureau.
9 20-city composite of the S&P/Case-Shiller Home Price Indices through January 2011; www.standardandpoors.com.
10 On the Other Hand: Economic Insights, First Quarter 2011 edition, by Bob Baur and the Principal Global Investors Economic Committee.
To obtain a prospectus, download online or call Customer Service at 1.800.222.5852
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Customer Service at 1.800.222.5852.
A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.
This Web site was created and is maintained by Principal Funds Distributor, Inc. exclusively, and not by the Directors of the funds.
Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.
Not FDIC or NCUA/NCUSIF insured - May lose value - No bank guarantee - Not a deposit - Not insured by any federal government agency
