The Nvest Market Blog, our current thoughts on the Street

Only Slightly Higher after Days of Churning - Week ended 3/26/10

posted 03.29.2010 at 10:11 a.m. by steve

Net-net, it was a week of churning for the major indexes. Despite the S&P gaining +0.58% (Dow +1.01%; NASDAQ +0.87% w/w) for the five trading days, stocks traded in a wide positive range on several days only to finish roughly flat. The week began with the passage of healthcare reform, an almost tireless source of uncertainty for the markets since Obama took office over one year ago. With that headache out of the way, stocks advanced, but Government attention will now turn to financial regulatory reform which could prove volatile for stocks of the financial sector in coming months. Meanwhile, it was generally another week of mildly favorable economic data. New jobless claims dropped to 442,000 which is a new low (good news) for this recovery cycle. And, while the final 4Q 2009 GDP number (old news) was revised slightly lower on Friday with weaker than previously thought consumer data, recent reports are showing continued incremental improvement in consumer confidence/spending, business equipment investment (capex) and rising export activity.

So why did the indexes fail to move significantly higher, or hold onto big intraday gains throughout the week? For one, many investors are probably feeling a sense of hesitation after 6 weeks of strongly positive market activity. Since February 8, stocks have risen by an average of about 10%. Many will argue that a pause is overdue. Secondly, and perhaps more detrimental to last week was that the US Treasury had several weak auctions of treasuries, suggesting that investor appetite for new issues of US debt is ebbing. Weak demand for US debt means that, if prolonged, interest rates will begin to rise. And, a rise in the general level of interest rates translates into home loan rates also creeping higher, potentially choking off a housing recovery; recovery for the housing sector remains very important for the US economy. Still, despite the weak treasury auctions last week, and hesitancy of many to embrace the current rally, pressure remains high for investors to redeem zero-yield money market shares in favor of riskier assets that continue to outperform expectations. Momentum remains one of the biggest assets for the recent rally. This good-Friday shortened week ends the first quarter of 2010; it looks set to be the fourth consecutive quarter of positive performance.

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Obama Signs Healthcare Reform Bill into Law - Investment Implications

posted 03.23.2010 at 10:18 a.m. by steve

After a year of polarized and heated debate, President Obama has managed to pass a bill on healthcare reform. The bill intends to expand healthcare coverage to some 30 million additional Americans who are currently without access and has been projected by the Congressional Budget Office (CBO) to reduce the federal deficit by billions over the next decade. However, expanding coverage while reducing the deficit can only mean one thing: higher and/or new taxes are needed. Indeed, the new healthcare reform bill does levy some new taxes on higher income earners in the form of an income and investment surtax.

JPMorgan has published a brief Market Bulletin to address the investment implications of this new reform. The article does a good job of removing political views and summarizes the facts as they relate to your investments. If interested, we encourage you to read the short article by clicking here: JPMORGAN HEALTHCARE BULLETIN.

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Melt-Up Continues - Week ended 3/19/10

posted 03.22.2010 at 10:00 a.m. by steve

Despite their sell-off in higher volume on Friday, US markets managed to again finish the week in positive territory as economic data continues to paint a picture of recovery. The large-cap Dow led the rise domestically with gains of +1.10% for the week, while the S&P 500 and NASDAQ moved up +0.86% and +0.29%, respectively. The market got its biggest boost for the week came on Tuesday, as the FOMC reiterated its pledge to remain accommodative to economic growth by keeping status quo the language of rates remaining low for an extended period. However, the zero-interest-rate-policy is beginning to draw some criticism and worry by those with acute inflation awareness. At first glance, one would think that the low cost of borrowing would stoke inflation (gold did rally following the Fed statement), but it is important to also look at how much slack remains in the economy. For instance, an interesting stat worth noting and one that is directly keeping inflationary pressures at bay, is that payroll employment would need to increase at 200,000 per month for 12 years for the ratio of employed-to-working to get back to its peak in 1999. Bottom-line, while the economic recovery seems increasingly sustainable (albeit at a slow pace), but it will take a long time for employment to return to more normal levels and for overheating to occur. Stable data out this past week on both producer (PPI) and consumer prices (CPI) confirms that inflation is not even close to an issue right now.

This week looks set open on weakness. Investors will again be forced to watch relations between the US and China. As we have noted recently, China appears to have an increasingly influential voice on world economic matters; China made its way through the global recession in far better shape than developed economies like the US and have little patience for being told how things (currency valuation, trade, etc) should work. In addition, US investors will also be trying to digest what new healthcare reform will mean to businesses and economic growth in the years ahead as it appears the Democrats have managed to pass a bill (it appeared dead earlier this year) through the house against all odds. Outside of those two themes, we will also get fresh data from the housing sector (which remains depressed), durable goods orders, jobless claims and the final number on 4Q GDP (Friday).

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Grinding Higher - Week Ended 3/12/10

posted 03.15.2010 at 09:59 a.m. by steve

Last week marked the one-year anniversary of the bear market low on the S&P 500 (March 9, 2009). Since then, US stocks have been on a tear having risen nearly 70% in that time. Investors managed to brush aside those bad memories in the most recent week with US stocks continuing their grind higher. The broad S&P rose +0.99% last week. Economic data both here and abroad was encouraging (exception being China). Notably, retail sales, employment, consumer net worth and other indicators have posted better than expected numbers recently; a much welcome change from the month of January. Month-to-date, stocks have advanced over 4% with smaller-companies having led the way.

As we have mentioned countless times, the current rally remains unloved and un-embraced. As evidenced by the continued lop-sided flow of money to bond funds (and non-existent flow to stock funds), it appears that investors still do not believe the rally in stocks is sustainable for a variety of reasons. The economic calendar this week looks light, but will offer data on several key sectors including manufacturing, housing, inflation and jobs. We believe that economic data can continue to surprise the market, which continues to have very low expectations. Perhaps more important this week will be the interaction of indexes with their recent resistance levels. Many market technicians (those who study price, momentum and trend) have suggested that if the S&P can close above 1,150, then the rally can continue much higher. The rationale for such a belief: with so many retail investors having yet to participate in the stock market recovery, pressure to exchange their money market funds for stocks and chase performance higher becomes ever greater.

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Despite Doubts, Rally Continues - Week Ended 3/5/10

posted 03.08.2010 at 09:51 a.m. by steve

The first week of March was strongly positive to investors as the market rose in each of the 5 trading sessions. The broad S&P 500 advanced +3.10%. Large-cap stocks trailed their smaller-cap peers, easily seen by the difference between the Dow (large-cap) which rose +2.33% in the latest week; while the NASDAQ (more all-cap and tech) rocketed +3.94%. International equities have also trailed domestic in recent weeks. Worries abroad continue to weigh on those markets closest to the root issues, but have eased somewhat. And, economic data has improved lately as well, with data last week meeting/exceeding consensus expectations.

Last week was full of employment-related data. Early-week releases surprised expectations to the upside. They were especially welcome given the bad weather across the country during February (which typically negatively impacts employment and consumer confidence). The biggest news of the week was the Employment Report which showed that payrolls declined -36,000 in February. Prior months were also revised higher showing fewer lost jobs than previously thought; the unemployment rate remained stable at 9.7%. While those numbers sound unimpressive (and Harry Reid will likely regret being put on the record saying Friday was a day Americans should celebrate), the number was dramatically better than expected and implies we are not far off from seeing payroll growth. Less significant last week, but still important was that housing sector data also rebounded after weeks of very sluggish numbers.

With the economic data again trending favorable and international worries easing, it is important to note that the recent stock market advance has occurred in the face of a still very skeptical audience. Bond funds continue to experience inflows at a breathtaking pace while stocks experience negligible amounts. It suggests that retail investors are tired of getting paid an almost-zero yield in money market accounts, but still do not view the current rally (now 12-months old) as a sustainable new bull market. That leaves open the possibility that this market continues to surprise everyone to the upside. There is lots of money that will feel pressure to chase performance as the length of the rally continues, keeping momentum alive. It will be interesting to see if the first week of March can continue its upward trajectory; with the S&P back above early-year support, we think it can.

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February Concludes in Positive Territory - Week ended 2/26/10

posted 03.01.2010 at 09:52 a.m. by steve

Despite the rocky start, US stocks managed to finish the final week of February only slightly lower with the S&P down -0.42% over the 5 trading days. But the month of February concluded in positive territory; the S&P 500 and Dow were up +2.85% and +2.56%, respectively bringing the indexes to within a hair of where they finished 2009. Since the beginning of 2010, the markets have been forced to chew on a multitude of worries including weaker economic data (housing and employment related), regulatory changes, China tightening, Eurozone sovereign debt and more. Consumer confidence dipped considerably last month. One bright spot in the latest week was the upward revision of 4Q GDP to +5.9%, but the composition of the report suggests that the robust growth is likely to come at the expense of future quarters (due to inventory restocking) unless consumer spending/confidence picks up dramatically. But there is one x-factor that could provide another temporary boost for the consumer: tax-refund season is upon us.

With that being said, we have successfully made it through another of the historically weak months of the year (February). Seasonally speaking, the March through May period is historically one of the stronger series of months of the year. Of additional importance this spring will be housing sales. The spring selling season is the most important for the sector as it accounts for more than double the selling activity of any other season of the year. To see housing data rebound in the near future would be a big boost for the economic recovery as it directly influences employment data and consumer confidence. Seasonal factors aside, corporate earnings season is quickly winding down with most index constituents having already reported for the 4Q period. The markets will have little to focus on outside of political developments and economic data, which are likely to remain troublesome. In regard to the economic data, we fully expect that data points from February as they become available this month will look extremely weak due to much of the country experiencing bad, snowy weather. As we have mentioned in recent weeks, snowy, winter weather has a chilling effect on the economy as well by distorting unemployment claims and putting a damper on consumer confidence. This week there is a lot of new data for the market to digest, especially relating to employment with 6 reports directly related to that area; as stated above, it is likely those numbers are disappointing. Stay tuned.

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