Commentary for the week ending 3-12-10

It was a fairly quiet week on Wall Street with little movement among the major averages. For the week, the Dow gained 0.55%, the S&P 500 gained 0.99%, and the Nasdaq had a nice showing with a gain of 1.78%.

Source: MSN Moneycentral

With light volume and low volatility on the stock exchanges, the market hit a new 17-month high this week. It looks like the economic recovery is continuing, albeit at a slow pace. We received some encouraging reports that helped move the market: the trade deficit narrowed and retail sales rose by 0.3% last month. These retail sales figures caught many by surprise, since the snowy conditions had many economists predicting a decline in sales. Still, this is welcomed news.

With the good comes the bad, though. Shortly after the retail sales were released on Friday, the University of Michigan consumer sentiment index showed a drop from the previous month, dampening the enthusiasm among investors. This report means that fewer people are optimistic about the economy. It’s not hard to see why, when unemployment remains high and the future is cloudy, and energy prices keep rising.

While on the subject of energy, this week Goldman Sachs revised their forecast for oil prices to a range of $85-$95 per barrel (it is currently trading just over $80). For the past several months, oil has been trading in a range of $70-$80, so a price over $90 per barrel will likely send gas over $3 per gallon. Obviously this will put a damper economic growth. While these forecasts are often wrong (Goldman once predicted $200 per barrel- it only reached $150 at its peak), it is still a discouraging scenario that must be considered.

There are several items we will be keeping our eyes on next week. For economic reports, we will get industrial production, housing starts, producer price index (PPI), and consumer price index (CPI). The most important event we will be watching comes on Tuesday, as the Fed holds its monthly meeting. While we don’t expect any change in interest rates, traders are focused on any indications of when they may begin to raise rates. We could be in for a more volatile week next week.

Where are we investing now?

In the short term we remain optimistic, but cautious. As we have said in past reports, we believe the easy money and stimulative measures currently in place will help the markets higher. Higher interest rates, higher taxes, increasing government involvement in the private sector, and high unemployment have us a little worried for the longer term.

There is no change in our current investment strategy this week. In equities, we are focusing on higher-quality and multi-national stocks. We are still bullish (optimistic) on commodities and believe that government policies will weaken the dollar in the long term. TIPs continue to be a favorite, as we expect inflation to increase in the future. Consequently, U.S. treasuries are sector we are very bearish (pessimistic) on. Finally, we are optimistic about international stocks, as emerging markets (excluding China) are areas we favor.