January 2011
Posted November 21, 2011
In this Issue:
The Capital Markets
U.S. stocks had their best December since 1991, and closed out 2010 with double-digit gains for the year. Small– and mid–cap stocks led the way, but results were fairly strong for all sectors of the U.S. stock market. Gains were particularly strong in the first half of December, as the market responded favorably to an extension of the Bush-era tax cuts.
The Economy
A plethora of recent economic data indicates better growth is now underway in the U.S. economy. We will begin with recent manufacturing and services reports. In December, factories showed growth for the 17th straight month. Thus, manufacturing has been a strong performer ever since the recession officially ended in June 2009.
Inflation or Deflation
In a speech in October, Federal Reserve Chairman Ben Bernanke sounded a note of concern over deflation. He said that for the first time in many decades, the Fed has had to take seriously the possibility that inflation can be too low, as well as too high. This concern was clearly behind "QE II," a second round of quantitative easing policy in which the Federal Reserve is purchasing large amounts of Treasury bonds. The intent of the policy is to force yields lower in the Treasury market and thus encourage borrowing by consumers.
The Outlook
As noted earlier, we have increased our expectation for GDP growth from 2.6 percent to 3.1 percent for the year, with the possibility of growth accelerating above 4 percent in the latter half of the year.
