March Madness

In my family, March Madness is our favorite time of the year. My wife typically makes a delicious basketball cake in early March for me and the boys. Both of my boys completed a bracket this year and are faring better than I am, something my youngest is reminding me of on a daily basis.

In the spirit of March Madness, here is a graphic that depicts how the stock/bond markets are impacted by different variables:

stocks sweet sixteen

The first quarter was very strong for the stock market with healthy gains and low volatility, almost a carbon copy of the first quarter last year.  The S&P 500 and the Dow led the way while bonds and gold struggled.  In 2010, 2011 and 2012, the US stock market peaked during one of the four weeks of April.  In each case economic momentum slowed down, fears from Europe resumed and a stock market correction of between 10 and 19% ensued. That being said, 2013 is a different year and the massive amount of money being printed by central banks across the globe could help keep any market pullbacks shallow.

In recent weeks I have repeatedly been asked if investors in the United States should be concerned about the economic unrest in Cyprus. If you have not been paying attention here are two articles that discuss the situation in Cyprus:

Cyprus is a tiny country, but in this particular case the response from the European Central Bank to Cyprus' request for bailout funds is why an investor needs to pay attention to what is going on.  In the recent past, banks in Greece, Spain, France, Portugal have called upon the European Central Bank(ECB) for bailout funds.  But for the first time the ECB has demanded a one-time tax on individual bank deposits in return for the bailout money Cyprus requsted.  Up until this point bank deposits in Europe have been insured, much like FDIC insurance here in the United States.

Now that the ECB has put seizing individuals bank deposits on the table as a prerequisite for bailout money the question is will the public's trust in the banking system in countries like Italy, Spain and France begin to decline.  If so, the public could begin to withdraw their funds from local banks en masse and the European crisis could come back into focus. I am not predicting what will happen, and if history is any indication the ECB may come up with another temporary "solution" (shorter-term stopgap) that tries to contain any fall-out from the Cyprus debacle.  We will continue to monitor this situation very carefully.