Market Week: May 17, 2010

The Markets

The Dow gained back almost all of last week’s losses in a 400-point rally on Monday after a European bailout package was announced. Despite giving back roughly half that gain at week’s end, U.S. equities still managed to squeak back into positive territory for the year, led by the small caps. However, global equities continued to suffer from fears of default and the possibility that the austerity measures needed to fight budget deficits might hamper global recovery. As a result, gold surged to a record high and the dollar hit its highest level against the euro since fall 2008.

We remain optimistic on the equity markets longer term; however, a short term trading high may have been put in place in late April. There has been a significant recovery since the so called “Flash Crash,” but the broad indices have been unable to attain their previous levels. In addition, trading has been characterized by light volume and significant intraday volatility. With this in mind, we feel it prudent to be cautious in the near term.

On the equities side, we favor the Health Care, Technology, Consumer Staples and Consumer Discretionary sectors. On the commodity side, we remain bullish on Precious Metals (specifically Gold and Silver) and the US Dollar against most major currency pairs.

Market/Index	2009 Close	Prior Week	As of 5/14	Week Change	YTD Change
DJIA	10428.05	10380.43	10620.16	2.31%	1.84%
NASDAQ	2269.15	2265.64	2346.85	3.58%	3.42%
S&P 500	1115.10	1110.88	1135.68	2.23%	1.85%
Russell 2000	625.39	653.00	693.98	6.28%	10.97%
Global Dow	1984.48	1823.64	1852.23	1.57%	-6.66%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.45%	3.44%	-1 bps	-41 bps

Last Week’s Headlines

• The Securities and Exchange Commission announced that exchanges had agreed to “a framework” for strengthening circuit breakers designed to prevent events such as last week’s “flash crash.” However, no formal explanation for the dramatic drop has been made public, though investigators are said to be looking at trading in S&P 500 futures contracts and some firms’ decision to temporarily halt high-frequency trading systems during the chaos, thus preventing them from making a market.
• Broad-based gains in manufacturing drove up U.S. industrial production 0.8% in April, according to the Federal Reserve Board. The Department of Commerce said April was the U.S. manufacturing sector’s best month since June 2004, expanding for the ninth straight month. Construction spending in March also was up by 0.2%, mostly on nonresidential public projects such as roads.
• The U.S. trade deficit reached its highest level since December 2008, expanding 2.5% in March, according to the Department of Commerce.
• Retail sales were up 0.4% in April from the month before, according to the Census Bureau, and up 8.8% from a year earlier.
• Productivity rose during the first three months of 2010, though the 3.6% productivity gain was less than the previous quarter’s 6.3%. The productivity gain more than offset a 1.9% increase in hourly compensation, according to the Bureau of Labor Statistics. As a result, unit labor costs for nonfarm businesses–one indicator of whether inflation is heating up–declined 1.6%.

Eye on the Week Ahead

Wednesday’s deadline for Greece to repay €8.5 billion in debt will dominate traders’ attention, though any upward movement in inflation data also could have an impact.

Key data releases: Treasury international capital flows, housing market index (5/17); wholesale inflation, housing starts (5/18); consumer inflation, Greek debt repayment deadline (5/19).

Recommendations are not suitable for all clients. Please contact us to discuss specific investments mentioned in this report.