Weekly Stocks Recap, March 27, 2009

Bull Market or Consolidation?

Another strong week as the broad market advanced 6.2% last week. That makes the third straight week that the market has advanced reducing the Year to Date loss to 9.7%. Most of the weekly gain came on Monday, but the fact that the stock market held those gains through the rest of the week was an excellent sign of resistance. Investor confidence appears to be returning and with that will come the more cash to push stocks higher. In our view, the stock market has been consolidating in the 800 range (S&P 500) for nearly six months now, since November of last year. Yes, there have been large swings above and below that level as we have seen over the prior two months, first losing more than 24%, before recovering 22% over the last three weeks. These percentage movements have made for a very rocky market over the last six months. However, when those market movements are smoothed out over a longer period, we see a market that has been consolidating in that 800 range. Many consider a bull market to have begun once the stock market moves more than 20%. The market has now moved up more than 20% from its March lows! However, our view is more cautious as we believe it is still too early to call for the start of the bull market. Frankly, we see the recent move as more of a consolidation back to that 800 level. Although not ready to jump on the Bull stampede, we are growing more optimistic that the worst may be over for the stock market. We sense that investor confidence is building and eventually that will bring the necessary demand to drive stock prices higher.

Economic Data Fuels Optimism!

Last week the economic news was pretty good. Existing home sales and new home sales both rose substantially more than expected. Estimates called for month over month declines, but instead both new and existing reports increased in the 5% range! Granted these increases need to be validated over a longer trending period, but nonetheless are encouraging signs. Reaching a bottom in housing will certainly help the economy regain its footing. Another positive was durable goods orders which rose 3.4% for the first increase in six months. Retail sales also showed strength with results that exceeded expectations. Consumer spending appears to be showing signs of life and that is critical for an improving economy. Last week long term mortgage rates moved lower as a result of recently introduced FED programs to buy up long term treasury securities. Those programs will help drive mortgage rates down for consumers, and lower rates will encourage refinancing and in turn put more money in consumer pockets. Consumer spending will pick up as the cash available to consumers grows. Mortgage refinancing is not the only factor driving up cash levels. Tax refund checks have begun to arrive and government relief programs are now taking hold which result in additional cash to taxpayers and consumers. We do believe having additional cash will help build consumer confidence pushing spending levels higher and driving the economy forward. However, we have not yet seen the jobs situation improve and unemployment may continue to rise over the next few months. The concerns over job loss and employment will certainly temper any growth in consumer spending that we do have.

Market Beating Foresight

Optimism is showing signs of life among both consumers and investors. The financial sector got a big lift from the Treasury and Federal Reserve last week. We sense growing optimism over improved financial regulation and plans for managing toxic assets. A stable financial sector is critical towards fostering a growing economic climate and we are growing more confident that the banks are regaining their footing. Spending will get a lift from rising cash levels as consumers take advantage of tax refunds, other government incentives, and lower mortgage rates. The economic data is encouraging and has been improving recently, although economic measures overall remain at low levels. For us, the next big milestone is quarterly earnings season in April and May. From these quarterly reports, we should get a very good reading on company performance and more importantly, on their future outlooks. In our view, the market has been consolidating in rocky fashion in the 800 range (S&P) for about six months now. We would expect the market to hold this range at least through 1st quarter earnings season. If company outlooks improve, the market could be poised for strong second half gains. With the growing optimism that we see, market volatility will likely trend downward. In that light, the market may not be as rocky as it has been over the last six months. However, the market will likely remain very choppy, as the market swings back and forth around this consolidation level. A choppy market should provide patient investors that want to enter the market with plenty of opportunity to buy on dips. All in all, we think the market will continue to show a positive upward bias, but the pace of that increase will likely slow from that we have seen over the past three weeks. We plan to increase our stock allocations slightly over the near term given the recent market strength. However, we plan to wait until after the next set of quarterly reports in April-May before raising our allocations significantly. As we said before, now may be a good time to begin gradually increasing your stock allocations.