Market Comments for 3/15/2010

Based on recent low volume in the stock market, it stands to reason that investors might be more preoccupied celebrating St. Patrick’s Day or filling out their March Madness brackets rather than doing any buying or selling this week. In the meantime, markets will look to build off recent momentum and digest upcoming news from the Fed’s meeting on interest rates and Washington’s final vote on the healthcare reform bill.   

Last Week:  Bolstered by a jump in retail sales and signs of strength in the banking industry, markets surged ahead again last week, posting impressive gains across the board to pull indexes closer to their highs on the year. Both the Nasdaq and S&P 500 were up around 1% and the Dow was up 0.5% on the week.

Two sectors that led the way last year – technology and financials – continue to help drive this market higher. Tech stocks are taking advantage of an uptick in sales as businesses slowly start to expand and upgrade their technology. Financials have focused on building cash reserves and restoring balance sheets to let Wall Street know that their dependence on mortgage loans and consumer credit has lessened.

Despite strength on the corporate side, data on the current condition of the consumer has been mixed. A recent decline in consumer sentiment seemed to be offset by a rise in retail sales. It is too soon to tell whether that was just “restocking” or if in fact consumers feel good enough to spend again. Based on high unemployment and an improving savings rate, it is hard to believe consumers are in a position to grow this economy by increasing their spending. I think it’s really more a sign of cabin fever setting in than anything else.

This Week:  The economic calendar is full this week with a Federal Reserve meeting and inflation data highlighting the events to come. Look for the Fed to continue to keep rates where they are but the key takeaway will be the Fed’s statement on the outlook. Markets are closely watching to see if the Fed signals it may be time to raise rates soon.

Also, the healthcare reform bill finally will come to a head this week as Congress must vote before it convenes on break and President Obama leaves for Asia. It should be very interesting to see how this political theater plays out once and for all.

On the earnings front, Federal Express will be releasing its latest quarterly earnings. This will be watched closely by the market as the shipping company is considered a good gauge of overall economic activity

Portfolio Impact:  As we reached the one-year anniversary of the market drop last week, the current stock market rally (except for an 8% pullback in late January) continues to gather steam. But does anyone notice? Based on low volume, it seems that most people are both apathetic and really unconvinced that this rally can last. There is still an overall lack of conviction in the market and a belief that once the government stimulus wears off (later this year) stocks could be in for a fall.

We continue to believe that based on so much conflicting data, the road ahead will be choppy. On the plus side, low interest rates, low inflation, stimulus and a healthy corporate sector can drive this market higher. On the down side, however, rising deficits, a deleveraging consumer, high unemployment and political pressures are all catalysts to drive this market lower.

In the meantime, as this plays out, we continue to focus on areas of the market that did not run-up last year – like high-quality and high-paying dividend stocks. In addition, international investing continues to make sense in the quest for additional return and diversification.

Despite stocks doing well, the demand for bonds continues to be high and that has made the fixed income market become more expensive and challenging in seeking out decent yields. We do want to keep maturities fairly short in the belief that we can capture higher rates as bonds mature given the assumption that rates eventually will rise.