The S&P Turns Positive

Investors continue to shrug off the many risks to the economy and corporate earnings as the S&P rose 3.4% yesterday and moved into positive territory for the year. We are still not convinced that good times are ahead as many risks still abound. Only 3 industry groups in the S&P Index are actually up this year but the excessive rise in technology, basic materials, and consumer discretionary goods carried the whole index higher. This narrow breath with small overall volume leaves us concerned about this rally in the bear market.

Yesterday some new economic tea leaves brought smiles to stock investors. Pending home sales rose both month to month and year over year. It doesn't seem like such a big stretch to think sales would improve from February to March as home buyers typically go shopping as spring approaches. It is good to see that 2009 is better than 2008 and perhaps housing has bottomed but we need many good months to clear out the inventory. China's manufacturing sector also showed an uptick which added another catalyst to the economic recovery. All these signs are good but may be countered by the many risks still facing this country.

Tomorrow we will hear about the results of the bank stress test. If the Wall Street Journal is right and 10 of the 19 banks will need to raise capital, there will be hundreds more who will also have to deleverage their balance sheets once the Federal Reserve examines their books. It will also likely result in many of them merging or taken over by the government. The stress tests also assume the unemployment rate tops out at 10.3% in 2010. That is a big assumption and we believe that the risk of the job picture being worse is high enough to be concerned.

We hope the markets have discounted the many future risks facing the global economy but hope is no way to invest. Corporate earnings will remain choppy and the banking industry and real estate markets will continue to have problems so we remain cautious as the bull charges ahead.