Week in Review, April 9

Stocks lost ground in a holiday shortened week with the S&P 500 down -0.7% through Thursday. Stocks are up +11.83% year to date. Bond yields fell with the ten year Treasury ending the week at 2.05%.

The unemployment rate fell to 8.2%, but only 120,000 new jobs were added in March. It was a weaker report and does raise a question about the strength of the economy. Stocks were closed but are likely to open lower on Monday while bonds have rallied this Good Friday morning.

Generally, the flow of other economic data last week was positive. For example, the ISM Manufacturing index rose 1 point to 53.4 from 52.4 in February. The ISM Non-manufacturing index slipped slightly more than expected to 56.8 from 57.3. The indices have been fairly steady with readings in the mid-50's the last few months, which is consistent with modest expansion. In addition, car manufacturers reported their best monthly sales in 5 years.

The Federal Reserve released the minutes from its March meeting. They are cautious about the economic outlook, and policy would seem on hold for both the fed funds rate target of 0%-0.25% (through 2014), and for additional unconventional policy measures.

Overseas, the European Central Bank maintained its 1% main interest rate while the Bank of England kept their benchmark rate at 0.5%, an all-time low. But rising yields in Spain and evidence of Italian backsliding on labor reforms caused some jitters in the European markets.

Consider this from USA Today: Tax cut impasse has many in limbo ..."tax uncertainty is holding back a lot of business investment. And taxes on capital gains and dividends will also increase in 2012. The alternative minimum tax will spread like kudzu. And taxes on estates will soar. The payroll tax will rise to 6.2% from 4.2%." Fiscal tightening in 2013 has been dubbed the Fiscal Cliff.

Stone McCarthy notes: The April 9 week presents a busy schedule of speeches as Federal Reserve policymakers take the opportunity to make public comments before the traditional press blackout period in advance of the April 24/25 FOMC meeting. At that time the Fed's collective economic forecasts will be updated and are eagerly awaited by the markets.

Data out next week includes the PPI and CPI inflation indices and the Federal Reserve's beige book on economic activity.

And of course, companies are set to release Q1 earnings. Bloomberg estimates a +4% q/q increase for S&P 500 companies. The bellwether is Alcoa earnings that are expected on Tuesday afternoon. After that, there is not much until J.P. Morgan and Wells Fargo report Friday morning. By the way, the forward P/E on the S&P is about 13x; fair value territory.

Jeff Pantages

Chief Investment Officer