Financial Market Update
StrategicPoint of View®
April 5, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
It was an upbeat week for economic news: consumer spending, consumer confidence, factory orders, and motor vehicles sales all rose. Although the ADP private employment figure fell 23,000, Friday’s Labor Department non-farm payroll number grew by 162,000. Granted, 48,000 of these jobs were from temporary census hiring, nevertheless the remaining 114,000 jobs were broad based, indicating a general, albeit modest, interest in hiring across major sectors.
S&P 500: 1178 (up 0.94% for the week and up 5.65% on the year)
Dow: 10927 (up 0.71% for the week and up 4.79% on the year)
NASDAQ: 2402 (up 0.71% for the week and up 5.86% on the year)
10-year: 3.86% (from 3.85% last week)
Crude Oil (May): $84.87 (from $80.17 last week)
Gold (May): $1,126 (from $1,104 last week)
USD/Euro: $1.3504 (from $1.3415 last week)
THIS WEEK
It could be a relatively quiet week as markets, which were closed on Friday, first digest last Friday’s jobs report and then hear data on activity in the service sector, pending home sales, wholesale inventories and consumer credit. Without much new news to move the markets, there is already talk of “selling in April” to jumpstart the adage: sell in May and go away (until some time in the fall.) This is balanced by a fairly upbeat quarterly report which could inspire other investors to keep on buying.
COMMENTARY
First Quarter Report 2010
Think back just a year ago and to how we were all feeling. The markets had come off their abysmal lows, but we didn’t yet know that. Fear still controlled our sensibilities and almost no one was willing to take on risk.
Flash forward to this past week when we closed the books on Q1 2010. The numbers were overall quite positive; risk assets are popular again; and fear has notably abated, although caution is being observed.
The Numbers:
Dow Industrials: +4.1% Dollar: +4.1%
S&P 500: +4.9% Euro: - 6%
Nasdaq: +5.7% Stoxx Europe 600: +4.1%
U.S. Treasuries: +0.9% Nikkei: +5.2%
Oil: +5.5% Shanghai Composite: -5.1%
Gold: +1.7% Dow Jones Global Index: +3.3%
US: The quiet drumbeat of positive economic data drove market returns during the first quarter. Manufacturing activity, productivity, muted inflation, stronger balance sheets (ex-financials) and low interest rates spurred profitability. 4Q 2009 earnings, as reported in January, were stronger than expected. Barron’s is estimating first quarter profit growth for the S&P 500 at 36%. As confidence in the recovery increases, markets have factored in stronger earnings growth. Some analysts believe that current stock prices already reflect the higher profit expectations. However, the best performing stocks have been the lower quality (higher risk) names, which means there may be room for the traditionally less volatile companies to grow based on reported performance and 2010 guidance.
Overseas: Europe struggled with sovereign debt issues, as evidenced by Greece’s deficit woes, but Portugal and Spain also experienced troubled balance sheets. China took steps to tighten monetary policy and control inflation generating fears that China’s moves could derail its spectacular growth. Countries dependant on commodity prices (which are often tied to China’s demand for raw materials) delivered mixed – albeit mostly higher - results.
Bond Markets: Corporate debt issuance rebounded late in the quarter, as companies attempted to corral investors before mortgage backed securities begin re-entering the private markets in the second quarter. Potential future interest rate hikes and an increase in mergers and acquisitions added to the debt boom. Investors, in turn, snapped up investment grade and below investment grade bonds in search of yield, as they became frustrated by the low cash returns in money markets and CDs.
U.S. Treasuries suffered late in the quarter when investors expressed a lack of confidence in the ability of the U.S. to fund its debt. The level of rates, which remain historically low, was less important than the volatility of the rate. Sudden changes create more urgency – in either direction – than a slow, steady rise or fall in prices.
Headwinds: Meanwhile, headwinds continued: a struggling housing market, lack of credit for small businesses, budget balancing challenges for state budgets, unemployment, and fears of the Fed reigning in spending, resulting in rising interest rates. Those headwinds won’t change in the second quarter.
Where to from here?
Any recovery has to be self sustaining, which means it should be driven by sales and not from cost cutting or inventory replacement. That means that consumer and business spending will be increasingly important. When businesses feel more comfortable with future demand for their products, they can increase their own spending and, in turn, hire more workers, helping to fuel the recovery further.
Meanwhile, balance sheets are strong – sporting excess cash. Some of this cash is expected to go into dividends; other amounts into mergers and acquisitions. Less is expected to be used for stock repurchase programs as stock prices have already risen dramatically from their lows.
Overseas, expect sovereign debt issues to continue along with China’s attempt to control inflation. Should China misstep, there could be major repercussions world wide, as China plays an increasingly critical role in the global recovery. Interdependence between countries remains strong, but each nation will be faced with unique challenges. As a result, there could be greater variance in the outlook for growth in individual countries.
Threats of a double dip have receded. Confidence is improving. But much uncertainty remains, especially as regards the potential for interest rates to increase. Our outlook has certainly improved over first quarter 2009, but we feel it is prudent to remain cautious.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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