Short and Sweet – Status Quo

With the first quarter of 2010 now at a close, I am happy to say that there is not much to report. Certainly there were headlines that will persist for years and decades ahead, the healthcare bill and the potential for default from an EU country (Greece) being the most prominent. Yet from the perspective of the market, both viewing asset price movement and economic indicators, we plodded along just fine.

The stock market saw an overall rise of 5.4%. Halfway through the quarter we saw a 5% decline in the market before it rallied 10% for its finishing close. A 10% swing in one quarter may seem like a lot but to put it in perspective, a year ago we were seeing 10% swings in a single day. Most of the movement for this quarter, however, could be viewed through the prices of just a few firms. GE, the whipping boy of the recession, staged a very impressive rally in March (they hinted at dividend increases next year.) Rising 21%, GE was the leader of the S&P stocks on a weighted basis.

This growth though is surprisingly lacking in support. GE, Boeing, and banks drove the bulk of the movement in stocks this quarter accounting for a third of the increase in the S&P500. The Dow Industrial’s performance is even more unbalanced, with GE and Boeing together representing half of the increase this quarter.

If you parse it further, GE was driven by a projected increase in the dividend, Boeing by the first flight of the 787, and banks by their increased profits. While it is assuring to see the markets move ahead, the rally is restricted to a few discrete events. It is by no means an indication that we are headed into a bull market, or even that these gains will hold.

The fundamentals from the economy have stabilized but remain discouraging. Unemployment remains at staggering levels, nearly 10% as reported and 17% of underemployed/unreported. The good news here is that we are no longer loosing jobs, and managed to gain a few last month. I underemphasize this news, however, since the bulk of the gain was driven by temporary census workers. Net of those folks it was just enough new jobs to keep pace with the growing population and labor. That is why the unemployment rate did not change last month.

The bad news is that the same folks are still out of work. Without jobs growth the traditional driver of the US economy, consumption, will remain below levels necessary for a full recovery. Without consumption, job growth will lag. We are currently experiencing a negative feedback loop that the market hopes will just go away. As the Economist astutely points out, America needs to change from a consumption-based economy to a savings and investment-based one. No longer will an overbuilt, shoddily constructed home serve us well. Instead, we need to see consumer debt levels decline as folks need larger asset pools for retirement. It will be a long road ahead for America, one in which we could lose our economic dominance, but it is a road that we can no longer avoid.

The one bright spot in consumption and technology, is Apple. With their amazing balance sheet including over $25 billion in cash, raging iPhone sales, the prospect of opening the iPhone to Verizon this year with a 4G model, and the iPad launch this week, they have successfully avoided the slump in consumer consumption. And yes, I am clearly biased, having received my new iPad this weekend. In case you have any doubts, it is a game changer.

In the mean time, enjoy the spring and let’s hope that the Northeast has a chance to dry out.

Regards,

David B. Matias, CPA