WHAT THE MARKET WANTS: April 2009
Spring Brings Hope to Market
April 2, 2009 5:25 PM The first week of March spawned a terrible market, chiefly caused by Moody’s downgrading the creditworthiness of J.P. Morgan and threatening to do the same to others. On March 6, the S&P 500 hit a low of 683, its lowest level in nearly 13 years. As so often happens when clouds are the darkest, the market recovers, and indeed, it did so this time, starting the second week of March.
Based on comments from Citibank, J.P. Morgan and other banks that they had indeed made profits for the first two months of the year, the market roared back with one of its best weeks since last November. That was followed with two more weeks of positive performance, caused by a plethora of leading indicators, such as durable goods orders, new housing sales, personal income, consumer confidence, reporting poor but better than expected numbers. In some cases, such as retail sales, there were small gains.
Cautious Optimism. To be sure, the unemployment reports and jobless claims continued to report downright frightening numbers, but it seemed that those who were employed were finally starting to come back into the economy and spend some money.
So March ended as the first positive month since December, with the Nasdaq leading the way, up nearly 11%. All of the indices we follow were up 8% or more, except for the Dow Jones Industrial Average , which gained 7.7%. It is very hard to say whether large-caps, small-caps or mid-caps did better, since they were all quite similar, but growth clearly outperformed value in each style/cap.
Granted. the first quarter ended up negative with the Russell MidCap Growth Index, the best style/cap, losing a little over 3%, and the Russell 2000 Value Index, the worst style/cap losing over 20%. The Nasdaq itself lost only 3% for the quarter, while the S&P 500 lost nearly 12%, so we should hold off on our celebrations until this rally extends further.
Some fairly violent down days have proved that we’re not out of the woods yet. This past Monday (3/30), the Administration came down pretty hard on the auto industry, and the market pulled back sharply. It pulled back sharply another day when a Treasury auction didn’t go well.
So the market is still a dangerous place, and the bear is not yet dead, but the breadth and continuity of this rally gives us some hope that the worst is over. Indeed, respectable economists are forecasting the economy to turn positive either late this year or early next. The market normally discounts 6 to 9 months ahead, so we are cautiously optimistic that we’ll see a number of positive market weeks in the months ahead.
Prudent Bargain-Shopping. This is the time for prudent building of your portfolio. The market is still awash with deep bargains, many not seen in the past 20 or 30 years, with a lot of excellent companies selling for 5 times earnings or less. Growth at a reasonable price and with strong cash flow is the favored characteristic of winners.
Growth metrics are the clear favorite of this market and have been since the first of the year. Historically, it is a sign of the end of a bear market when investors begin showing a clear preference for growth as opposed to value. That appears to be the case, at least for now.
David Brown
Chief Market Strategist
Sabrient Systems, LLC
Next update: First week in May.
