Weekly Stock Recap

Housing & Jobs Weigh on Market

Last week started off with a bang only to end with a whimper. However, the broad market did end the week with a slight 5% gain leaving a Year to Date loss of -1.8%. The start on Monday was strong and encouraging following the losses the prior week. Financials and investment firms led the way based on their improving outlooks. The bulk of first quarter earnings reports are nearly complete. Several key retailers announced particularly strong results that exceeded expectations, a sign that distressed consumer spending may be finally turning the corner. Frankly, spending has a long way to go before returning to levels seen from prior years, although the slowing decline we now see is encouraging. But the real story last week was the release of poor economic data on Housing and the Job market. Housing starts fell again to record lows on larger than expected declines. Jobless claims rose higher than expected with continuing claims once again setting new records. Frankly, these economic reports are not a surprise to us. The rate of deterioration in Housing and unemployment may be decreasing, but the bottoms remains elusive. In fact, we continue to believe that unemployment will not peak until later this year or even next year. For some reason, the market woke up and that realization weighed on efforts to push the market advance forward. It should be no surprise that the economy remains very weak and continues to decline across most measures.

Market Beating Foresight

We find the modest gain this week encouraging following the pullback from the prior week. The market had gotten a little ahead of itself, so we view the two week consolidation as a positive sign. Too much growth too fast just raises volatility levels. High volatility creates anxiety amongst investors and that usually slows the net inflow of funds into the market. Moderate and sustainable growth is what we like to see, and that helps investors maintain staying power for the long term. The economy remains very weak and in decline. However, first quarter earnings season was generally better than feared, and did not cause another market meltdown. We think now is an excellent time for investors to increase their stock allocations. The stock market will likely remain choppy, but we do not expect another meltdown barring an unforeseen world event. The market will certainly not be immune to bad news over the remainder of this year, such as bankruptcies that continue to mount. In fact, speculators are betting that General Motors will declare bankruptcy. It that does happen, we do not expect that announcement to cause another market meltdown. We think that investments made now and over the next few months will be very rewarding over the long haul. Investments made in the stock market today will look very good three to four years out. We also expect net cash inflows into the market to grow sharply over the remainder of this year. That will help drive a strong stock market recovery. Investors will not want to risk missing out on that recovery by sitting on the sidelines. In keeping with our plan, we are now moving aggressively to 100% equity investments in our stock portfolios now that the market has survived the first quarter earnings season. Generally speaking, we do not try to time the market as we like to stay fully invested in our stock portfolios except during times of unusual market volatility. The volatility we experienced in 2008 was truly unprecedented, and we expect the market to revert back to more normal volatility levels over time. That means we expect to carry higher stock allocations this year than what we carried last year. In addition, we are optimistic that the stock market will maintain a positive bias and uptrend for the remainder of this year.