Investment Insights
Gregory M. Drahuschak

Last month we noted that prospects for this April were appealing. In the 27 of the 38 previous years in which the S&P posted a March gain, April followed with a gain. This April made it 28 of 39 years with the S&P 500 posting a 9.39 percent gain - the best April result in the last 59 years.

This April’s performance for the S&P 500 was even more impressive when you look at it relative to all 700 months since 1950. In this context April 2009 was the twelfth best month.

In late March the market began to embrace the notion that the rate of decline in economic data has slowed and in some cases stopped. That thinking continued in April as many economic measures fell at a slower pace. A few actually rebounded. Even housing offered hints that the erosion in sales and prices that has extracted a significant toll on consumers and banks was nearing an end.

The most interesting report might have been the most recent release of the Philadelphia Federal Reserve Index.

After a steady and precipitous decline that started in as far back as June 2007 and began accelerating dramatically last September, the Index in recent months has flattened out.

Data Source - Philadelphia Federal reserve
Weekly unemployment claims likewise have suggested that the worst of the economic decline may be close at hand as the data seem to have peaked.
Data Source - U.S. Department of Labor
Not surprisingly the financial sector led everything in April and from the March market low. But moderation in economic data allowed many economically sensitive sectors to do well also.

Data Source - Standard & Poor’s
Years ago famed economist John Kenneth Galbraith made his sentiment about economic and stock market forecasting well known when he said, “We have two classes of forecasters: Those who don't know . . . and those who don't know they don't know. “

We fall into the first category. We know that we do not know with certainty where the market is headed, but we think there are some hints of possible market movement.
The rally off the March low has been vigorous in point and percentage terms, but it has been accomplished only with moderately good market breadth and moderate volume.

Largely the market has responded to a lessening in the degree of bad news rather than decided improvement in economic data. Earnings for a majority of companies have beaten expectations, but the expectations bar was set so low that leaping over it was not difficult.

The market’s streak of weekly gains from the March low through the end of April normally would suggest a period of consolidation or an interim correction is due. We think, however, it is more important to assess what an eventual level might be appropriate for the S&P 500 rather than trying to guess its near or intermediate-term path.

Considering the market’s valuation level, possible earnings for the S&P 500 and the market’s technical condition we think that a minimal expectation is for the S&P 500 to trade to 1000 at some point this year. We would not rule out 1100 as a possible target if the economy shows actual improvement. In Dow Industrial Average terms this equates to 9000 and 9500.

Our expectation in turn suggests that if the market does encounter a round of profit taking, buying into the pullback makes sense with an eye on taking profits during the recovery.

A major question for many investors is where the market already has embarked on a new bull market or not. On this score we suspect this is not the start of a new bull market but rather a potentially significant rally.

We would be cautious about being overly exposed to the retailing group due to the move it already has had as well as the prospect that beyond the immediate impact of the stimulus program consumer spending will be constrained for a potentially extended period.

In sum the March low probably was a meaningful bottom for the market and over coming months higher than present levels are likely, but without clear evidence of sustainable economic improvement not merely a slower rate of deterioration, getting beyond the S&P objectives noted earlier could take significantly longer.