First Quarter 2012 Market Activity and Recent Global Outlook‏

June 7, 2012 by  
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wall_street_longMany of the talking heads and news media want you to believe that the elections in Italy and Greece are responsible for the recent market sell-offs.  But, as we have been reporting for a while, this profit taking is typical and healthy due to the large first quarter gains. The political success of Socialist candidates in France and Greece weren’t a huge surprise and was baked into the recent decline. François Hollande had long been expected to win the French presidency and an anti-austerity backlash in Greece is so strong that candidates promising a return to the free-spending ways were elected in landslides. You can bet that the French and Greeks will soon demand re-negotiation of the bailout terms.

However, the rest of the European Union may not be so accommodating. “We in Germany are of the opinion, and that includes myself personally, that the stability pact cannot be renegotiated,” said German Chancellor Angela Merkel. I can’t tell you how the debt crisis will unwind … but we don’t think that it will end well.

And it looks like investors have caught on to that reality as every major index in the world is now trading below its 50-day moving average and the best performing sectors have been the traditionally defensive: REITs, food, drugs, beverages and utilities. Nonetheless, you should expect global stocks, at least for the short term, to fall in sympathy with the European stocks. Fear doesn’t know borders.  However, long term indicators suggest that this drop is a good buying opportunity.

After starting off with a bang, all the global markets are giving up some of their early gains. At the end of the first quarter, the MSCI Emerging Markets Index was up 14.1% but is now only up 9%.

That means that we started to to advise investors to be “defensive” at just about the right time.

Market Outlook:

Looking back at the first quarter of 2012, major equity markets delivered positive returns.

The MSCI All Country World Index, whichserves as a proxy for global equity markets, was up close to
12% for the quarter in U.S. dollar terms. The advance was powered by an ongoing economic recovery in the U.S. and news of
stabilization in Europe.

To keep you abreast of current market conditions, we invite you to view SEI’s “First Quarter2012 Market Overview
and Insights”
video.  This brief video will provide you a synopsis around what’s happening in the markets, the impact to SEI’s
strategies, and SEI’s outlook and positioning. https://a248.e.akamai.net/f/248/25855/14d/ig.rsys1.net/responsysimages/seic/__RS_CP__/QIR2012Q1_Video.HTML

What’s happening in the market?

Every sector in the MSCI All Country World Index once again posted gains, just as they did during the fourth quarter of 2011.

Information Technology stocks set the pace, with Financials, Consumer Discretionary, Industrials and Materials also posting double-digit gains.

The Barclays Capital Global Aggregate Bond Index, which represents global bond markets, gained just 0.87% for the quarter, masking impressive gains for
riskier assets. High-yield bonds and emerging-market debt outpaced their more conservative counterparts, while global government bonds lagged
notably.

U.S. equity markets, represented by the S&P 500 Index, saw their best first quarter in more than a decade, gaining 12.59%.
On the fixed-income side, the Barclay’s Capital U.S. Aggregate Bond Index rose 0.30%.

What’s the Impact to SEI’s Strategies?

First quarter economic reports were favorable in the U.S. In Europe, government support for the banking system and refinancing
of Greek debt soothed investors even as many countries continued to move toward recession. Global equity markets climbed in response to the good news. Emerging market
and small-cap stocks led their peers as investors continued to favor riskier assets.

SEI’s investments had a strong quarter, helped by our decisions to favor U.S. large-cap stocks over international stocks and high-yield bonds over
investment-grade bonds. Our equity Funds performed well against their benchmarks and our fixed-income Funds continued to deliver competitive returns.
Diversification across asset classes again produced the expected result, helping to dampen volatility.

SEI Outlook and Perspective:

Looking ahead, we are maintaining our strategic asset allocation targets with a neutral stance between stocks and bonds on a tactical basis. While equities have had
an impressive start to the year, we would not be surprised to see them pull back a bit in the coming months and would view any pullbacks as buying opportunities.

We continue to favor U.S. stocks over international stocks based on the relative strength of the U.S. economy. U.S. large caps, in particular, appear attractive.
Within fixed income, we favor an overweight to high-yield versus investment-grade, as relative-value opportunities are more attractive in the high-yield space. Our
economic outlook remains unchanged from last quarter. We expect to see continued growth in the U.S. and Canada with a mild recession in Europe. Geopolitical factors remain a concern, with the U.S. election on the horizon and Europe struggling. A spike in oil prices is a potential wildcard.

If you have any questions or would like to discuss this further, please feel free to give us a call.

Sincerely,

Richard