Market Comments for 3/08/2010

What a difference a year makes. It seems a like a long time ago, but this week marks the one-year anniversary of the market lows. If you recall, markets last March were still falling and there seemed no end in sight. Little did we know that the bottom was being reached and since then markets have rallied over 50% from the lows. However, keep in mind markets are still 25% off their highs set back in October, 2007.

Last Week:  Despite concerns regarding this economic recovery and a general lack of conviction, markets surged ahead again last week, posting impressive gains across the board to pull indexes back into the black for the year. Friday’s jobs report was hailed as progress by Wall Street as “only” 36,000 jobs were lost last month. Trends in temporary hiring showed a pick-up and also the average number of hours worked inched higher. There was a lot of speculation on how all the bad weather on the East Coast would impact the report, however, that proved to be overblown. The fact is it would have been very hard to label this report as disappointing, no matter how many jobs were lost. Just blame it on the weather.

Other factors in play last week, besides the jobs report, were continued signs of stability in Greece and strong corporate earnings (this time from retailers). The stock market is grabbing any positive news it can to contribute to this upward trend. Having corrected from its 8% pullback in late January, signs are in place that we have resumed this bull market rally that started last March.

This Week:  Look for a mix of political, economic and corporate news this week. The highlights will include McDonald’s February sales report, a slew of economic data from China and, of course, more news from Greece as its prime minister visits with President Obama.

We have seen one of our themes for this year – a focus on high quality, dividend-paying stocks – come into the news recently as stocks like Wal-Mart and Qualcomm have raised their dividend and also repurchased company stock. Not only is this treated as a sign of strength by its rise in stock price, but more importantly, it is a reflection of the diligence in which companies are stockpiling cash, rebuilding capital, reducing risk and generally becoming more efficient and profitable. If other companies follow suit – and they should – it could drive this stock market higher in the short-term.

Portfolio Impact: Another positive sign that markets are getting back to normal and stabilizing is the pick-up in corporate acquisitions and deal-making. This is being fueled by low interest rates but also by companies that have been fiscally disciplined and well- managed through the recession. These are the companies we focus on as they are the ones able to maneuver more freely within tighter credit conditions.

A stock like Exxon Mobil fits that criteria perfectly and looks like a good buy right now. It is an example of a company with impressive cash flows that was able to expand into the natural gas market (due to a recent acquisition) recently to add an additional potential revenue source. It is a core-type holding in the energy sector and fits the profile of a “buy low” stock as it did not participate in last year’s severe run-up.

In the fixed income markets, we are focusing on the low level of interest rates and trying to determine when the Fed might raise rates. It appears that the Fed will be on hold for at least the next six months. While that may be considered positive for the stock market, what it tells us is that this recovery is a choppy one. These low interest rates should be fueling growth but that is not the case. Banks, instead of lending, are building reserves, restoring balance sheets and reducing loan exposure. Consumers are still deleveraging, decreasing reliance on credit and spending less. Not to mention the fact that many people are unemployed and under-employed too. This leads us to conclude that while the stock market may rise in the short-term, the economic backdrop is still filled with uncertainty and at best slow and choppy growth.  Businesses, not consumers, are fueling this rally.