Apr 30, 2013 - Here's what happened in the stock/bond markets last week

Stock Market Analysis 4/22 - 4/26

Conclusions: The market rose nicely with the Dow advancing 1.1 percent and the small cap Russell 2000 jumping 2.5 percent. The advance was confirmed with three times as many stocks rising as falling and about 500 more stocks hitting new highs as new lows. While new highs may show the market having been on extended run, market breadth is comforting.

We are right in the middle of earnings season and economic reports aren’t giving us much confidence on future earnings. About half the companies in the S&P 500 have reported and adjusted earnings are only ahead about 3.5% from last year. Expectations had been adjusted downward, so the number of disappointments is in the “normal” range. However, I’ve never been a fan of that old phrase, “If it doesn’t meet your expectations, just lower them.” If 3.5% earnings growth is the new normal, then what should be the new normal for valuations?

The GDP report got the attention this last week and it was less than expected. We have been seeing a lot of this lately, with economic reports failing to meet estimates. This was true of retail sales and new orders and business confidence. We also get little joy from the coincident/lagging economic indicator. It continues to head lower, often a portent of a slowing economy. While little has been expected of the economy, hope has been rising with the stock market. Perhaps they are both on thinner ice than anticipated.

We have talked with a number of folks lately that are feeling the pain of the rise in stocks. They have been out of the market for a while and wonder if it is too late to jump in now. Market rallies are insidious in the heights to which they can take the market and also in how long they can continue on fumes. The market rose in spite of weaker than expected GDP growth and uninspiring earnings. Still, our risk readings are rising and we don’t want to overstay our welcome. We have trimmed equity levels and are watching the current bounce after a small correction in stocks. So far, the bounce has had some teeth to it, and could propel the market further. We would continue to look at culling underperforming stocks.

Barry R. James, CFA, CIC

Bond Market Analysis

Conclusions: The bond market rallied last week with long treasuries rising more than 0.5 percent and all major sectors of the bond market heading higher. For the year, high yield continues to outpace the other sectors, but at least all major domestic bond indices are positive for the year. We are glad to see this turn around. After hitting lows in March, the bond market has made steady progress in spite of all of the “Bond Bubble” talk.

A couple of weeks ago, our founder, Dr. James was talking with CNBC’s Maria Bartiromo about bonds. He, in fact, said that we liked bonds and thought interest rates were likely to head lower. He pointed out that so many were negative on bonds that rates could indeed fall. While we don’t consider low rates as permanent, a sluggish economy and low inflation are good recipes for bonds. If we get a stock market correction, that would be all the more reason bonds could provide a safe haven.

If you’ve ever spilt chocolate syrup on your shirt, you know the disappointment of the economic reports this last week. Every FED regional report was negative. Existing home sales softened (although a low inventory is reportedly the cause) and durable goods orders slumped. We could take some cheer in the GDP report since it was positive and consumer spending rose. However, real final sales were weak and inventory build-up accounted for more than a third of the GDP growth. In addition, consumer confidence is fading and may not support future advances in spending patterns.

Our bond risk indicators improved again last week. We wouldn’t expect the rally to keep the same pace as the last few weeks, but just a week ago we suggested that we were going to ”...maintain and even extend durations and maturities where appropriate.” We have seen nothing to change our mind.

Barry R. James, CFA, CIC