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A Sigh of Relief for Investors After Weeks of Declines - Week Ended 6/11/10
posted 06.14.2010 at 10:20 a.m. by steve
Stocks had their best week since March with the majority of the gains coming from a 273 point rally on the Dow Thursday, helping the most widely reported index recapture 10,000. Stocks managed also to extend those gains into a second day Friday (an occurrence that has become extremely rare since late-April), despite a weaker than expected retail sales figure. The week was not without its fits, as stocks again opened under selling pressure and Europe worries. All told, the S&P and other major domestic indexes gained roughly +2.5% in the five days ending June 11. Perhaps the biggest news came on Thursday when China announced that its economic activity was significantly more robust than even optimistic estimates, suggesting that a weak Euro currency is having less of a negative impact on export-oriented economies (like China). The fear had been that a weakening Eurozone could pull the world economy back into a double-dip instead of remaining a more isolated event. It should go without saying that the news of the last week does not erase the worry that has been so prevalent since late April. But, it does help investors feel that markets have been too pessimistic when assessing recent events in Europe.
Economic data continues to suggest that the US economy and other developed nations are currently in the midst of an economic soft patch (but still advancing). The news last week of falling retail sales in May, and housing data which continues to deteriorate following expiration of Government sponsored incentives; and stubborn levels of new jobless claims does remain troubling. That being said, monetary policy remains extremely accommodative and the money supply has increased for 6 consecutive weeks. The recent worries are likely to provide ample reason for central banks to keep rates low longer. Additionally, corporate balance sheets are now more flush with cash than at any time in history, suggesting they are well positioned to sustain the recovery (through continued hiring and capital spending) should their confidence improve enough to loosen the grip on their wallets. The most likely economic environment we believe is slow, choppy but positive growth.
This week we will be focused on data from the manufacturing sector, import/export prices, housing sector and jobless claims. We are interested to see how stocks interact with technical levels of resistance for the technical backdrop to reassert itself in a positive fashion. Meanwhile, from a long-term fundamental perspective, we continue to believe investors with long time horizons are better served by owning more stocks than other asset classes, despite the numerous headwinds facing the economy. Cash/money market funds continues to pay zero yield; 10-year treasuries (fixed income) pay just 3.3% and rising rates at some point will push prices down; while US stocks offer a dividend yield currently at 2% and capital appreciation potential.