Equities advanced again last week, with the Dow Jones Industrial Average climbing 1.0% to 10,850, the S&P 500 Index advancing 0.6% to 1,167 and the Nasdaq Composite rising 0.9% to 2,395.
The highlight of the coming week will be the March payrolls report. Recent declines in unemployment claims, coupled with hiring trends for temporary workers (including the addition of 75,000 census workers), have many guessing that somewhere around 200,000 jobs will have been created. As a reference point, roughly 115,000 jobs need to be added per month in order to keep the unemployment rate flat. Before too long, we should also see some indications of first-quarter earnings and gross domestic product (GDP) growth. For earnings, we have seen several quarters of positive surprises and we are expecting the same for the first quarter of 2010. Meanwhile, GDP data should further evidence the ongoing recovery and we expect that by the third quarter of this year the United States will have moved from recovery to expansion mode.
Although we remain generally positive about the course of the economy and markets, there are some downside risks. One of these is that money supply growth has been very weak, consistent with a lack of credit demand and availability. Another issue of potential concern is the interest rate picture. Treasury yields remain relatively low across the curve, but rates have been trending higher. In our opinion, a move up to a 4% yield for the 10-year Treasury would simply represent a confirmation that the economy is recovering, but a surge significantly higher than that could present problems. Regarding the Federal Reserve, lingering weakness in credit markets and the absence of inflationary threats should prevent the Fed from prematurely raising rates. Finally, another risk that investors need to be aware of is the ongoing possibility of protectionist trade actions being taken by Washington, D.C. In our minds, a serious shift toward protectionism would be a negative for the economy and bearish for risk assets.
In sum, we would characterize the current environment as one of a broadening global economic recovery marked by improving corporate earnings, low interest rates, increasing business and consumer confidence and, we hope, a labor market that should soon turn more positive. Markets have turned increasingly bullish on economic growth, both in terms of how fast the economy will grow and in confidence that it will actually happen. Since the mid-January to mid-February market correction, stocks have climbed more than 10% and are currently up between 4% and 5% for the year. So far, equity markets have frustrated the bears, since any signs of price weakness have been quickly reversed. In the short-term, there is a possibility that stocks may have gotten ahead of themselves, as some technical indicators are looking stretched. Nevertheless, an ample amount of cash remains on the sidelines, and the macro backdrop suggests to us that the long-term path of least resistance for stocks continues to be up.
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