If Nostradamus had told me that during the first quarter of 2011 we would experience ...

Spreading political unrest across the Middle East and North Africa ... including the outbreak of a major civil war in one of these oil producing countries ...

A devastating magnitude 9.0 earthquake and tsunami in Japan that could spark a nuclear meltdown in the world’s third largest economy ...

Growing inflation fears fueled by skyrocketing food and oil prices with West Texas Crude closing above $110 a barrel ...

I would NOT have believed the S&P 500 Index would finish with a GAIN of 5.4 percent for the first quarter ... not after this kind of negative news. But that’s exactly how well US stocks have performed and it shows just how strong the global economy appears right now, as we transition toward more sustainable growth.

That markets can keep moving higher in the face of such unpredictable instability with only a brief, shallow correction along the way, is remarkable.

Ignore the Hype ...

It also serves as an important reminder to tune out the constant noise and tone down the hype from the evening news. Instead, try to stay focused on the fundamentals that matter most.

Let’s face it, financial markets can move every which way from day to day — and even week to week — depending on the scary story du jour. For the most part, this is just random market noise that’s useless to analyze ... much less to use for making investment decisions. You simply shouldn’t read too much into this stuff and you must be constantly on guard against overreacting.

Of course, that’s easier said than done because financial markets are, in large part, nothing more than the collective sentiment of its all-too-human participants. And we know that most investors respond to unexpected events with an irrational mix of emotions, including: fear, greed — and, at extremes — panic or euphoria. That’s just the way we’re all hardwired.

And that’s why, perhaps now more than ever, you have to be a disciplined investor with the experience to recognize the key issues and indicators to focus on and which to ignore.

Here are a few of the key indicators we’re watching closely right now at Banyan Partners:

Quickest Profit Rebound on Record: As earnings season gets underway in earnest, note that S&P 500 profits are poised to surpass the 2007 profit peak at some point this year. Should this occur, it will go down in the record books as the fastest post-recession rebound in earnings since at least 1900 ... which is as far back as records go.

For the full year, analysts expect S&P 500 earnings to jump about 7 percent to $92.76 per share. That means the blue chip stock index is only trading at about 14 times this year’s likely profits. This seems undervalued, compared to an average forward price-earnings multiple of 15.7 historically.¹

These estimates could easily prove too conservative. After all, S&P 500 profits have exceeded analyst forecasts for eight straight quarters. And it’s likely we’ll see more positive surprises as we move through this earnings season.²

Over the next few weeks, the real key is to watch what companies have to say about their prospects going forward. What you really want to focus on is the all-important, forward-looking guidance, because a poor outlook could lead to more short-term market volatility in the coming weeks.

Well-Positioned, US Multinational Stocks: Global industrial production, which bottomed over two years ago, has been soaring ever since, rising 20 percent beyond the previous peak. Accelerating growth in global markets — especially emerging countries — is driving this worldwide expansion.³

That’s one of the key reasons why our Banyan core equity portfolios are focused on large-cap, US stocks doing brisk business internationally. More than HALF of total profits for S&P 500 companies come from overseas today and firms with an international focus are producing much faster sales growth.⁴

The global economy is poised to deliver GDP growth of about 4.5 percent this year and next. That’s more than one-third faster than domestic US GDP growth of about 2.9 percent, according to estimates.⁵

And we’re finding plenty of opportunities in high quality US multinational stocks that earn a large share of profits in global markets, including firms in the technology, energy and industrial sectors. Also, we recently boosted our allocation in the undervalued US health care sector.

Subdued Sentiment is Another Positive: While the US stock market has almost doubled since its 2009 lows, many investors seem wary of the market. In fact, mutual fund investors have yanked a net $115 billion OUT of domestic equity funds over the past two years — while piling into bond funds with net inflows of $605 billion!⁶

In other words, retail investors have been running the wrong way for the past two years now. We see this negative sentiment as a contrary positive sign. And it ties directly back to what I said earlier about keeping your emotions in check and ignoring the headlines …

There’s been no shortage of things to worry about when it comes to the economy and financial markets in recent years. Negative headlines in March are certainly testament to that. But it’s when investors grow too complacent and STOP worrying about the market ... that I start to worry.

Once everybody has embraced the stock market and is fully invested, that’s the time to turn cautious. Right now, investor sentiment is still too negative.

Bottom line: Last month’s headline-grabbing events sparked volatility in global markets that is still with us, but the S&P 500 managed to keep moving up in the first quarter in spite of it all. Over the next few weeks we’ll get a good look at corporate profit results and more important, forward-looking guidance. This could result in more market swings in the weeks ahead, for which our Banyan investment team has been preparing. Stay tuned.

Good investing,

Mike Burnick
Director of Client Communications
Banyan Partners, LLC

P.S. To get a closer look at how we’re allocated in our Banyan core equity portfolios, just go here to contact a Banyan investment consultant to learn more about the details behind our asset allocation.