Surface Calm

Posted on April 14, 2010 by David Laidlaw 

The rebound in the equity markets continued during the first quarter of 2010, building on last year’s momentum as the broad indices increased by 4-6% over the period.  The only blip resulted from anxiety regarding sovereign debt and the ability of governments to repay their debts.  Though by no means settled, it is now assumed that the Europeans, possibly with the International Monetary Fund’s help, will bail out Greece without leading to another round of financial panic.

The steadiness of the market’s climb during March has been eerie, with many days where stocks rose roughly 0.5% and very few days that posted losses.  The overall lack of fear is captured by the Volatility Index, the VIX, which now stands at 17 and is way down from its peak of over 80 reached during the height of the panic at the end of 2008.

The economy continues to expand from last quarter’s strong growth, albeit at a slower pace.  The consensus opinion calls for GDP growth of about 3%.  Much of this growth is due to businesses rebuilding inventories that were depleted during the recession.  Both the manufacturing and service sectors of the economy are expanding strongly according to recent reports from the Institute for Supply Management.  The jobs report in March indicated a net addition of 162,000 nonfarm jobs which is the first significant addition since the recession began at the end of 2007.  The gain in jobs includes 48,000 temporary workers hired for the census, but still suggests that over 100,000 new jobs were created.  The unemployment rate held steady at 9.7% and may be slow to decline. 

 

During the first week of the quarter, the U.S. Treasury is auctioning another $83 billion dollars worth of bonds to finance the government’s debt.  This issuance, along with concerns over the long-term credit quality of the bonds, has finally caused Treasury bond prices to weaken.  10-year Treasury yields are now approaching 4%, which we believe is still not sufficient to compensate investors for the risks involved.

Regarding stocks, corporate earnings and balance sheets are still very strong; however, the market has rallied roughly 50% over the past year.  While we still view stocks as more attractive than other alternatives, there are less buying opportunities than in recent periods. 

The economy continues to expand from last quarter’s strong growth, albeit at a slower pace.  The consensus opinion calls for GDP growth of about 3%.  Much of this growth is due to businesses rebuilding inventories that were depleted during the recession.  Both the manufacturing and service sectors of the economy are expanding strongly according to recent reports from the Institute for Supply Management.  The jobs report in March indicated a net addition of 162,000 nonfarm jobs which is the first significant addition since the recession began at the end of 2007.  The gain in jobs includes 48,000 temporary workers hired for the census, but still suggests that over 100,000 new jobs were created.  The unemployment rate held steady at 9.7% and may be slow to decline. 

During the first week of the quarter, the U.S. Treasury is auctioning another $83 billion dollars worth of bonds to finance the government’s debt.  This issuance, along with concerns over the long-term credit quality of the bonds, has finally caused Treasury bond prices to weaken.  10-year Treasury yields are now approaching 4%, which we believe is still not sufficient to compensate investors for the risks involved.

Regarding stocks, corporate earnings and balance sheets are still very strong; however, the market has rallied roughly 50% over the past year.  While we still view stocks as more attractive than other alternatives, there are less buying opportunities than in recent periods.