Weekly Stocks Recap, April 10, 2009

Fifth Straight Week of Market Gains!

Another strong week as the broad market advanced last week for its fifth weekly gain in a row! The S&P Index has now pared its Year to Date loss to -5.2%. That is a dramatic 26% turnaround from the lows that were hit in early March. But the NASDAQ has been an even better performer and now sits with a Year to Date gain of 4.8%. We definitely sense that the market is beginning to stabilize and that investor confidence is growing. The stock market advance over the past five weeks has been strong and has been supported by higher trading volumes. The optimism that is building will encourage more and more investors to leave the safety of cash bringing even greater demand for stocks to drive prices higher. We too are feeling that the worst may be over for the stock market, although the economic struggles are likely to continue for some time.

Signs Economy is Stabilizing!

The economic data was a bit better last week, but still provides overwhelming evidence of a struggling economy. However, the economy appears to be showing some signs of stabilizing although at very low levels. US retailers posted smaller-than-expected sales declines, a hopeful sign that consumer spending may turn soon. In fact, the S&P retail index gained 4.6% for the week with Macy as one of the industry leaders. But the economy will likely continue to struggle for some time. New jobless claims fell last week, but claims remain at very high levels that suggest peak unemployment is still a ways out. Perhaps the biggest market mover last week was the financial sector. Financial stocks got a big lift from Wells Fargo after the bank forecast a profit of $3 billion for the first quarter and indicated they saw significant strength in their mortgage business after refinancing hit a six-year high. The financial sector has been at the heart of the global economic crisis, and an improving outlook for banks will surely drive the stock market higher. Another sign of the changing market sentiment is the Volatility Index (VIX), often referred to as the fear gauge. Last week the volatility index closed at its lowest level since September 2008. Lower volatility is a sign that the market is beginning to stabilize. However, as we have seen over the past year, market movements can swing wildly very quickly, particularly when there have been strong moves in one direction.

Market Beating Foresight

We like the signs that we see of growing investor confidence and optimism. The financial sector has been very strong over the last month as prospects improve and regulatory assistance takes hold. Banks are critical to a recovering economy as credit needs to be freely available. Banks will start to ease credit restraints once write-offs and delinquencies begin to trend down, and profitability forecasts become more optimistic. Wells Fargo helped drive financial stocks significantly higher last week with strong earnings forecast that was much higher than expected. Additional quarterly announcements are due next week from other large financial companies and expectations may now be higher following the Wells announcement. We find the signs of profitability in the financial sector very encouraging, but would also caution that a significant portion of the reversal in fortune is due to banks that over allocated for loss reserves and write-offs in past quarters. Wells in particular is thought to have been very conservative with the write-offs taken as part of the Wachovia acquisition. The point here is that a long and sustained recovered will have to come from a healthy and growing economy, not the short or one time gains from write-off adjustments. We do expect consumer confidence to trend upward as consumer cash levels rise from tax refunds, other government incentives, and lower mortgage rates. Another big milestone is quarterly earnings season which will get in full swing over the next two weeks and run through May. We think the quarterly reports and future company outlooks will set the tone for the market in the coming months. If future outlooks improve, the market could be poised for strong second half gains. The stock market and economy do appear to be stabilizing. Our best guess is that the stock market will continue to trade with an upward bias, but we would also caution that 8% monthly gains cannot be sustained month over month. In that light, we would expect an upward trend and bias that is far more modest. But for investors, slower and steady moves are a good thing. Greater stability and lower volatility will bring more investors off the sidelines, and that will provide even more interest and demand for stocks. The overall economy will probably continue to trend downward or at least remain at very low levels as unemployment continues to rise. We still expect the market to remain choppy as it swings around current trading levels. In our minds, now is a good time for investors to gradually begin increasing their stock allocations and we plan to do that with our own funds. However, we still plan to wait until after the next set of quarterly reports in April-May before raising our stock allocations significantly.