Weekly Stocks Recap, April 3, 2009

First Monthly Gain in Eight Months!

Another strong week as the broad market advanced 3.3% last week for its fourth weekly gain in a row! Even better, those four weeks left the broad market index with a monthly gain of 8.5%, the first monthly gain in 8 months. However, despite the large monthly gain, Year to Date performance remains at a loss of 6.7%. All things considered, it does feel like the market is starting to stabilize and investors are gaining more confident. March price movements were indeed rocky, but we find the recent strength very encouraging. We mentioned last week that the market has been trading in a wide range around 800 now for the past six months. Right now the market is on the upper end of that trading range and we think the next few weeks will be very telling with regard to its long term trend. Many stock market pundits now consider the worst to be over. That could be right, but we also don’t think the market can sustain the recent trend and rise 8% each month for the rest of the year. Given the strong advance, do not be surprised if the market pulls back or trades in a much smaller range over the near term. Nonetheless, this appears to be a good time for investors that are sitting on the sidelines to gradually re-enter the market.

Market Advances Despite Weak Economy!

The economic news last week again highlighted the weak economy. The stock market was able to advance for the week despite less than good economic news. Home prices came in with declines worse than expected at 19% year over year. In addition, consumer confidence remains at low levels and was lower than expected as measured by the recent March reading. Manufacturing reports continue to show a contracting economy, although the rate of that contraction is slowing. The jobs situation continues to be the more troublesome indicator, as jobless claims continue to mount. Most economists expect unemployment to trend upward and at 8.5% is already at the highest level since 1983. We would not expect the unemployment rate to crest until later this year or even early next year. The other big news was the pending bankruptcy of GM and Chrysler. The CEO for GM was forced out last week, and news rumblings are rife with bankruptcy talk. It may be very likely that GM does enter some form of bankruptcy protection, although we suspect the government will help soften the impact of such an event on the larger economy. As for Chrysler, the government has been blunt suggesting that they have 30 days for which to consummate an agreement with FIAT. The government message is that Chrysler will not be bailed out if a merger agreement is not reached. The market has been taking the potential for bankruptcy from these automakers in stride as stock prices still advanced through the week despite all the talk. We are more cautious as bankruptcy with one or both of these automakers will have significant downstream impacts on supply chain participants and other industry stakeholders. The market did appear to get a lift from the Financial Accounting Standards Board when it was confirmed that mark-to-market accounting rules would be eased.

Market Beating Foresight

Optimism continues to build among investors. The financial sector continues to improve and got another lift last week with easing of the mark-to-market rules. The stock market showed strength last week despite weak economic data and looming bankruptcies in the auto industry. That optimism is helping to sustain the strong monthly gains experienced in March. Consumer confidence remains at very low levels, but did show a slight improvement over prior readings. The trend is in the right direction, but clearly there a long way to go before consumer confidence drives spending to old levels. But it’s the trend that will drive stock prices higher and we do expect consumer confidence to trend upward. Confidence and spending will improve 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 bias and trend that is far more modest. But for investors, that is a good thing. 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 its recent trading levels. In our minds, now is a good time for investors to gradually begin to increase 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. That may mean that we leave on the table some of the market gains if there is a strong advance while we are mostly in cash. However, right now, we value the addition risk protection from being in cash more that the potential loss of gains from a market advance.

Remember, our complete list of stocks is Available Online At: http://www.marketbeatingstocks.com