Baird

SARASOTA – The equity markets, for the first time in three weeks, turned in a winning performance last week with most of the popular averages gaining more than 1.0%.   Support for the rally was provided by continued low interest rates and strong first quarter earnings gains. The U.S. dollar fell again last week, losing more than 1.0% for the second week in a row and is now just 3.0% above its all time low.  The downward spiral of the dollar is a direct reflection of loose monetary policy on the part of the Federal Reserve. The weak dollar is playing a major role in the economic recovery by giving the Nation’s exports an edge, and is significantly boosting corporate profits through currency translations.  More than usual, the focus of attention this week for stocks and the dollar will be on the April Federal Reserve meeting.  Although QE2 is set to expire at the end of June, Bernanke is expected to announce that it will be extended by using interest income and maturing securities on the Fed’s balance sheet to continue to buy Treasury bonds.  This is expected to give additional support to the stock market.  But it also has implications for the commodity and currency markets that are at the root of the unstable global environment.  The strongest sectors are energy and materials with health care showing the largest increase in relative strength the past two weeks.  

The indicators of investor psychology show pockets of excessive optimism.  The most recent report from Investors Intelligence (II), which tracks the opinion of Wall Street letter writers, shows a small drop in bulls and a corresponding rise in bears last week.  The II data showed the majority of advisors were bullish (54.2%) and just 19.2% bearish.  The latest data from the American Association of Investment Managers (AAIM) shows an 83% commitment to equities from 81% the previous week (50% is considered bullish and 80% bearish).  The CBOE Volatility Index plunged to a new cycle low finishing the week at 14.69 (16 is considered bearish and 24 bullish). The CBOE 3-day equity put/call ratio fell to 60% from 66% the previous week (51% is considered bearish and 62% bullish).  The CBOE 10-day put/call ratio is the sole indicator showing investor concern as the ratio climbed to 94% from 92% (75% is considered bearish and 95% bullish).  The weight of the sentiment indicators argues that complacency rules among the majority of investors which could leave the market particularly vulnerable to any negative news developments.
 
The U.S. economy continues on a slow north bound trajectory.  The Leading Economic Index (LEI) rose in March recording its ninth consecutive gain.  Economic growth could slow in the summer months, due to rising energy prices and disruptions caused by the disaster in Japan but any weakness should be cushioned by the momentum gathered earlier in the year.  The labor and housing markets remain tenuous.  The four-week average of jobless claims moved up to 399,000 last week (below 400,000 is consistent with employment gains).  Existing home sales rose 3.7% in March and median home prices crept higher but remain 6% lower from a year ago.  The bad news is there remains an 8.4 month supply of homes on the market and not until this number moves to 6 months will home prices find a bottom.  The yield on the benchmark 10-year Treasury note was nearly unchanged last week at 3.40%.  The huge rise in food and energy costs is fanning the flames of inflation expectations but the reality is that because core items in the household budget are demanding a large portion of discretionary income, the rise in commodity prices is also destroying demand for other goods and services.  Without wage growth it will be very difficult to generate inflation on a wide scale.  This could be one reason bond yields have remained low and stable despite the growing anxiety over head line inflation. 

Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.

Evan R. Guido
Vice President of
Private Wealth Management

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