Financial Sense Archive Editorials

NOLTE NOTES
Onward to 12,000
by Paul J. Nolte, CFA
April 13, 2010

‘Scuse me while I kiss the sky. Ok, so the markets didn’t kiss the sky, but certainly got traders excited when they, for a moment, crossed the 11k mark on the Dow. In what has been a six-week march to the sky, the markets have breezed past the bailout of Greece (for yet another week!), the closing of over 40 banks so far this year and continued signs (even mentioned by the Fed chief) that the economy will need to be on life support for the foreseeable future. Instead the focus is on those very low short-term interest rates, modestly better economic data and excitement over the upcoming earnings season that kicks off Monday. While the purple haze of the markets seems to center around the “free money” available by the currently low rates, the haze is likely to hang around Wall Street for at least a few more months. The focus over the next three weeks will center on earnings and then the unemployment report due on May 7th. As long as the European community behaves and earnings come in close to the high expectations, the markets should continue their merry way toward the next round number of 12,000 on the Dow. No need to fret until the Fed decides to quit dealing the free money.

There have been a total of sixty-seven trading days so far this year, and the market has had a hair under two-thirds of the days where the majority of stocks traded higher, with more than a couple of days where the majority was just negative. Six weeks of advancing stocks has put many of the short-term indicators in very over bought territory, meaning a decline could break out at any time. What “corrections” there have been over the past six weeks have been modest, many lasting for portions of the morning before buying comes in to pump prices higher. It may sound odd, but we feel more comfortable discussing the long-term valuations of the market than trying to guess the short-term gyrations. When looking at various valuation models for the broad market, they are all pointing to below average returns over the next few years. While last March’s bottom may have been “the” bottom, we are expecting that a buy and hold strategy from current levels may not be profitable when looking forward 3-5 years. Unless we are under estimating the earnings power of the US over the next few years, we are expecting returns to be mid-single digits over the next 3-5 years.

The bond model remains stuck in positive territory, indicating yields could be falling over the coming weeks. A combination of factors has bumped the 10-year bond yields toward 4% over the past couple of week – huge supply of issuance to finance our deficit, stronger equity markets (why hold bonds when stocks are doing so well), stronger than expected economic data and some fears of inflation given the huge amount of money put into the economic system to avoid the March ’09 meltdown. Issues with sovereign debt (Greece), still lower housing prices and a subdued consumer are keeping yields from racing significantly higher. With the Fed “anchoring” rates at near zero, we are expecting more volatility in the bond market than usual over the next few weeks.

© 2010 Paul J. Nolte, CFA
Editorial Archive

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

Contact Information

Paul J. Nolte, CFA | Managing Director, Dearborn Partners
Chicago, Illinois | (312) 334-7123 Tel | Email | Website

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