Market catching its breath
May 15, 2009

In our last Market Update, we were cautiously optimistic about the direction in which the stock market and economy were headed. We discussed our belief that one of the primary catalysts for the first quarter market upswing was money moving off the sidelines and into the market. We still believe this to be the case, but with more conviction as not only are individuals getting back into the stock market, but large institutions are as well. Because of the recent market turmoil, large institutions are re-evaluating their allocations to hedge and private equity funds (some having over 40% of their total assets allocated to these investments). Many have plans to reduce their allocation to these assets classes and move the proceeds into more ?traditional? asset classes like stocks and bonds. This should help buoy the stock market in the months ahead.

The S&P 500 declined nearly 5% last week. We believe last weeks? activity to be a temporary pullback. These are the times we look to put ?sideline? cash to work. At the time of this update, the market is surging as investors hunt for bargains following last week?s slump. They are using the sideline money referenced above, with conviction based on a positive economic outlook. This is a complete shift in psychology from just two months ago when investors sold on any uptick in stock prices.

In the first quarter of this year, 68% of S&P 500 companies have beaten analyst earnings expectations. And while slight, this is the first time since the third quarter of 2007 that corporate earnings estimates have actually shown improvement. Today, home improvement retailer Lowe?s reported better than expected earnings, in addition to profit forecasts for Q2 that exceeded analysts? expectations and raised its full year projection. These are encouraging signs that the dismal housing market may be nearing its bottom. Many economists believe a comeback in housing will be necessary for the U.S. to emerge from a recession.

One of the reasons for the market decline last week was because the outlook for economic growth was called into question after very bleak unemployment numbers were announced. Unemployment rates are still expected to rise from current levels even into 2010. But while this information sounds dismal, keep in mind that unemployment usually peaks six months after the economy begins to emerge from a recession. Companies downsize during a recession as sales slow or fall off. They usually don?t hire back until they believe the recovery is sustainable. Therefore, any uptick in sales will go directly to the bottom line and earnings will be much better than expected. That is part of the reason why stocks rise well before unemployment starts getting better. Those that wait until all of this information looks rosy will miss the boat.

The THOR Team