THE COMEBACK CONTINUES, from Bob Doll, vice chairman and chief equity strategist for fundamental equities, BlackRock

Stocks advanced yet again last week (for the fifth consecutive week), benefiting from a backdrop of generally strong economic news. For the week, the Dow Jones Industrial Average climbed 0.7% to 10,927, the S&P 500 Index advanced 1.0% to 1,178 and the Nasdaq Composite rose 0.3% to 2,403. With these gains, stocks are now up more than 10% from their early February lows.
Data released last week was generally in line with an economy that is firmly improving. The ISM manufacturing survey for March was above the 50 mark for the eighth consecutive month and is now at its highest level since the summer of 2004. Forward-looking indications are that strong production levels should continue. Also, data released last week showed a continued comeback in consumer spending levels and in retail sales, also positives for the broader economy. Even the beleaguered housing market has been showing improvements, with the Case Shiller home price index for January showing the eighth month of upward moves.
Perhaps most important, last week also saw the release of the March payrolls report, which showed that 162,000 jobs were created for the month, 123,000 of them from the private sector with the rest from the hiring of census workers. Additionally, the report also showed some upward revisions to private sector hiring from January and February. By year-end, we expect the unemployment rate will have fallen modestly, perhaps to around the 9% level.
All of this is not to say that the economy and the markets will experience smooth sailing from here. In recent weeks, we have been highlighting some of the downside risks, including ongoing credit-related issues (chiefly in the euro region) and the possibilities of premature policy tightening (chiefly in China). To these, we would add a slowdown in the rate of economic growth in Asian economies. These markets have been key drivers of global economic growth in recent years, but have been foundering a bit over the last six months. Additionally, we remain concerned about protectionist sentiment from Washington, DC. In all, equity markets have not been overly concerned about these risks, but these are trends that bear close monitoring.

SPRING MOMENTUM, From David Kelly, chief market strategist, JP Morgan Funds

The week ahead should be a quiet one for economic and market data. Investors will have a chance to digest recent reports on manufacturing activity, auto sales and employment, all of which suggest that the economy is gathering momentum entering the spring.
Numbers out this week shouldn’t alter that perception. The ISM Non-Manufacturing Survey could show a further slight strengthening in the service sector, although it is manufacturing which appears to be leading the recovery. The Pending Home Sales Index may also log a slight gain, although multiple sources of information still suggest a very tepid bounce-back in the deeply depressed housing sector. Unemployment Claims may also edge down a bit while Chain-Store data, due out on Thursday, should confirm weekly reports of a significant rebound in retailing. Overall, the general perception among economists over the last few months appears to be that the economy is firmly on a recovery track – a view that is only partly reflected in stock and bond prices and not at all in measures of consumer sentiment.

The earnings season won’t really get underway in earnest until next week with this week’s numbers including only a handful of reports on S&P500 companies. At the start of the season, consensus estimates sum to $17.17 for the S&P500, essentially unchanged from $17.16 for the first quarter. However, it is worth noting that the median earnings report last quarter surprised by more than 5% on the upside – a similar set of surprises this earnings season could push us to $18 for the quarter, continuing a very healthy recovery trend in profits.  
It is also worth noting that economic growth appears to be accelerating going into the second quarter. While real GDP growth for the first quarter appears to have been in a range of 2% to 4%, the second quarter could see a number closer to 5%, which, were it to materialize, could have a significant impact both on perceptions of the recovery and prospects for the bond and stock markets.

A VIRTUOUS CYCLE, from Jeffrey Saut, chief investment strategist, Raymond James

We have been wrong-footed (on a short-term basis) for the fourth time since our “bottom call” of March 2, 2009, having turned cautious, but not bearish, three weeks ago with the SPX in the 1150 – 1160 zone. That “cautionary counsel” was driven by numerous indicators we have come to trust over the years. Yet, those indicators have been trumped by the near-term upside momentum. Fortunately, while trading accounts are not fully engaged, investment accounts are. That strategy is based on the simple thesis that booming corporate profits are fostering an economic recovery, which is leading to an inventory rebuild and a capital expenditure cycle. In turn, said sequence should promote a hiring cycle, and then, a pickup in consumption. We think, in the intermediate-term, such a sequence should bolster stocks into mid-summer, even though we remain cautious as the second quarter begins.

In any case, despite our near-term caution, the aforementioned “virtuous cycle” should persist until the markets begin to discount the 2010 mid-term elections next November. Through our lens, those elections may well serve as a referendum on the liberals’ versus conservatives’ agendas. If the liberals prevail, it could spell a pretty tough year for stocks in 2011. If, however, there is a conservative backlash (read: no tax increases combined with spending cuts), it could provide the footing for a decent 2010 year-end rally. Meanwhile, our “call” for the return of inflation is playing with crude oil and copper breaking out to 20-months price highs. To put it simply, the U.S. has only three options: sovereign default (unimaginable); severe economic contraction (unlikely); or currency debasement, which has been the preferred political strategy for decades. Inasmuch, we choose door number three and have/are positioning accounts for inflation.

A REPEAT PERFORMANCE, from Jeffrey Kleintop, chief market strategist, LPL Financial

In the first quarter, the stock market followed a volatile path that looks to be on track to end with a solid gain. We believe this pattern of performance may repeat in the second quarter, given the conditions and events that are likely to unfold during the quarter.

• April presents a number of challenges to the rally driven by the earnings season, the Fed, China, European credit conditions and the uncertainty surrounding actions on financial reform legislation.

• Given these factors, a 5-10% pullback within the second quarter would not be unusual as the stock market tracks a pattern similar to the first quarter. However, we expect a pullback to be followed by a rally to a new high for the year, as conditions remain positive with above-average economic growth, improving credit trends, low interest rates and the return of job growth. The LPL Financial Current Conditions index reflects conditions favorable for strong economic and profit growth. We expect these conditions to remain positive in the second quarter with above-average economic growth, improving credit trends, low interest rates, and the return of job growth.

CD’s vs. US Treasuries and Agencies, From Stephen J. Huxley, chief investment strategist, Asset Dedication

The safest bonds one can buy are those issued by or protected by the federal government. Unfortunately, the ultimate source of the safety is the fact that the US Constitution gives the Treasury Department the right to print money, so it can always run the printing presses to pay off debt.   

Nevertheless, bonds, notes, and bills issued by the US Treasury and federal agencies, and CDs insured by the FDIC are considered super-safe securities. They set the floor on rates investors can expect from fixed income securities.
Generally, CDs offer slightly higher yields because they are less liquid than Treasury or agency bonds. They also have some limitations: Maturities are not available for periods longer than 10 years, and the insurance is only good for up to $250,000 per depositor per bank. But most retirees who are withdrawing income for living expenses will not be hampered by these limitations. In fact, for those investors who dedicate their fixed-income allocation to providing predictable cash flows, CDs work well because dedication is based on the principle of holding securities to maturity. So any time CD yields are higher, they are perfect for dedicated portfolios.  
Last week, for instance, they were higher for maturities of 5 years or less. CDs were offering yields averaging about 2% for bonds with maturities before 2015, whereas agencies were yielding only about 1.7%, treasuries, 1.3%. But for maturities beyond 2015, agencies and treasuries beat out CDs. In fact, agency and treasury yields increased on average about 25 to 30 basis points per year of maturity beginning in 2016.  


Monday, April 5: March ISM Non-Manufacturing index; February Pending Home Sales Index

Tuesday, April 6: ICSC/Goldman Retail Sales (weekly); Federal Open Market Committee minutes released (March meeting)

Wednesday, April 7: Mortgage Applications (weekly); February Consumer Credit

Thursday, April 8: Jobless Claims (weekly); April RBC Consumer Attitudes and Spending

Friday, April 9: February Wholesale Trade