Markets continued their upward climb in spite of low volume as most indexes were up over 3% last week in just four days of trading with the markets closed for Presidents’ Day. The combination of Chinese and U.S holidays, calm over European debt levels and little political posturing provided a nice backdrop for stocks. Even the Fed raising the discount rate failed to dampen the rally.
Last Week: Despite trading volume literally coming to a halt Friday during Tiger Woods’ press conference, stocks surged ahead to post their second consecutive week of gains. In fact, over the past two weeks, markets are up around 5%, thereby helping to offset the pullback we saw from mid-January when markets fell around 9%. For the year, U.S. markets are close to flat.
What is driving this current market rally? Earnings and forecasts from corporate America have been very strong as the majority of companies are beating their estimates. The strength of the earnings has not been through just cost-cutting but rather solid sales growth. Signs are slowly starting to emerge that businesses are ramping up their inventories and expecting better days in the future. This could bode well for the employment picture as productivity gains start to slow companies will need to hire additional employees.
Specifically, Barclays, Whole Foods, John Deere and J.C. Penney all came through with better-than-expected earnings proving that business is picking up across many sectors of the economy. Despite high unemployment among its clientele, retailers are finding success in carefully managing inventories, setting prices and improving margins.
This Week: Market direction will again hinge on economic data and corporate earnings. In addition, President Obama looks to revive health care reform as he calls together a summit with both Democrats and Republicans.
Key economic reports will include consumer confidence, new home sales and durable goods. Estimates are for continued improvement in the data as markets will look for more evidence on just how strong this economic recovery looks to be.
Earnings reports are starting to slow down, however, DTE Energy, Nordstrom and Campbell’s Soup are expected to report their results.
Portfolio News: It is important to note that markets have generally been flat since last November. We continue to see a market that struggles to find its direction. In this, the second year of the recovery, we are expecting positive gains for the stock market but it will be choppy, resembling the economy in general.
The news that the Fed is bumping up the discount rate is really more symbolic than anything. Banks borrow from the Fed at the discount rate only for unusual circumstances or emergencies. The federal funds rate, which remains at historical lows of 0% to 0.25%, is the more commonly used measure in terms of banks borrowing and lending among each other. Fed members made it clear that this move in the discount rate in no way reflects any change in the Fed’s current view that interest rates should remain where they are. And inflation remains in check (given the record low CPI numbers released Friday), leading us to believe the Fed is on hold until the second half of the year at the earliest.
As we continue to see a market that stops and starts, we are positioning portfolios to capture opportunities that become available. We are looking for areas of the market that did not participate in last year’s rally. This includes sectors like healthcare, utilities and consumer staples. It makes sense to have some exposure in these “defensive” areas to complement our weightings in growth areas like emerging markets and technology.
We expect some rotation to occur as areas that were the big winners last year like emerging markets and technology could give up some of their returns. It is a good time to capture some profits while still maintaining exposure and look to add areas like dividend-paying stocks. This is the type of market where a mix of growth and defensive sectors should help combat short-term fluctuations.