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Jewish World Review April 8, 2009 / 14 Nissan 5769 Analysts debate the future of the rally By Gail Marks Jarvis
http://www.JewishWorldReview.com | (MCT) Spring at last. With the strong rally in the stock market over the last four weeks comes the reminder that winter does give way to daffodils and budding trees. "It's finally safe to open your statement, nod a grin for the monthly return, and quickly set the paper aside," said Standard & Poor's senior index analyst Howard Silverblatt. But if you are planning your next move into the market, don't forget to take an umbrella. After a more than 20 percent climb in the Dow Jones industrial average, many analysts say that the stock market is not cheap and they are expecting another downturn. "A consequence of the March strength is that it produced overbought readings," said Tim Hayes, chief investment strategist for Ned Davis Research. That has set the stage for "at least a partial retest of the March lows." Analysts are debating whether the stock market, which remains down about 45 percent since October 2007, is done going to new lows and whether it's time to buy stocks that will do best in a recovery. Many are hesitant. Hayes said he thinks the lowest lows of the bear market have been reached. To make sure, he will be watching the likely downturn in the market near-term for signs that it's safe to add stocks. The key, he said, will be breadth, or whether a wide range of stocks and markets across the world remain fairly strong. Hayes has been encouraged by rallies in many areas of the world. Even though stocks plunged in January and February, almost half of the 42 developed and emerging countries Ned Davis tracks did not fall back to the lows reached in 2008, as the U.S. did. Among the strongest have been Latin American countries. In addition, emerging market stocks received a boost this week at the G-20 meeting of world leaders. They committed money to the International Monetary Fund, which will have about $1 trillion more to lend to emerging markets. They have been suffering because of a falloff in demand for commodities and products amid the global recession, and they have been starved for loans in a worldwide credit crunch. Although economies throughout the world are in a recession, analysts have been encouraged by new orders of goods in Asia, particularly China. JPMorgan strategist Thomas Lee said that increased activity in Asia, along with the fiscal stimulus passed by Congress and the plan by the Treasury to guarantee or directly purchase troubled assets from banks, should help to boost manufacturing activity in the coming months. Typically, when investors begin expecting an economic recovery, they start investing in cyclicals, companies that do well amid increasing growth, including technology, retailers, manufacturers and materials. Technology has made a particularly strong move of late, with the Nasdaq composite index the only main market indicator in positive territory for the year. Recently, oil and metals also have been showing strength. Although oil, at about $50 a barrel, is down significantly from its high of more than $147 in July, it has climbed about 40 percent since mid-February. Metals also are up, with copper rising nearly 24 percent in the past month. With cyclicals gaining momentum, Lee has begun suggesting investments in materials and industrial stocks. And he has warned investors to pull back from defensive sectors such as health care, which tend to lag in an upturn. Overall, Macroeconomic Advisers sees "faint signs" of economic recovery and, with that, expects stocks to climb. The view for a vigorous upturn, however, has been tempered by the recent rally. "Equities no longer look sharply undervalued," the firm said. As investors evaluate the potential and risk in stocks, Russell Investments senior portfolio strategist Steve Wood is warning that risk-averse investors could be disappointed if they are relying heavily on U.S. government bond funds. Treasuries were the one clear winner of 2008, as nervous investors fled to safety and caused funds to soar more than 20 percent. During the last quarter, however, the trend shifted. According to Morningstar Inc., U.S. government bonds were the losers among bond funds - down about a half of a percent during the first quarter. Meanwhile, corporate bond funds, which had declined about 3 percent in 2008, climbed almost 2 percent during the quarter. Wood suggests that rather than betting on one sector or another in the stock market now, an investor would be safest to stay diversified. Goldman Sachs strategist David Kostin notes "it's better to rotate" from defensive sectors into cyclical sectors late rather than early. "Recoveries have three states: pop, stall and sustained rally. If an investor misses the pop out of the trough, months four through 12 provide a second chance not only for positive returns but also for cyclical performance." ___ Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". Sign up for the daily JWR update. It's free. Just click here. Gail Marks Jarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement without Living Like a Pauper or Winning the Lottery." Comment by clicking here.
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