The Market Today

April 2009 Market Recap
Presented by Adam Brooks, Daniel Evans, & Jared Pearson

Optimism returns
In stark contrast to earlier in the year—when bleak forecasts dominated the landscape and investor risk-aversion reached a crescendo—the collective sentiment in April grew decidedly more upbeat. Rose-colored glasses were back in fashion, and, although economic data hasn’t shown universal improvement, the belief that the worst of our economic malaise is behind us gained increasing acceptance. Housing market statistics showed some signs of stabilization, consumer spending took an unexpected jump, and corporate earnings reports from the first quarter surprised to the upside in many cases. Even potentially damaging news like the swine flu outbreak and the governmental stress-testing of banks—which likely would have sent markets reeling in recent months—failed to derail the early spring surge.

There is concern in some circles that the rebound has been perhaps a bit too drastic and that markets are now anticipating an economic resurgence that may be prove elusive. But for battered investors, the recent rally has no doubt brought a welcome reprieve.

Theory of relativity
The rally has been fueled in some measure by economic reports that, while far from emblematic of a robust economy, can nevertheless be construed as positive relative to the market’s fears for a continued sharp deterioration. For instance, home prices fell 2.2 percent nationally in February, and yet that somewhat mild decline was taken as a sign that home prices could be in the process of stabilizing. Likewise, sales of existing homes fell 3 percent in March, according to the National Association of Realtors, but roughly half of transactions involved first-time home buyers—a sign that low mortgage rates, price declines, and government tax incentives are having the desired effect of enticing new buyers to market.

It was more difficult, however, to put a positive spin on initial estimates of first quarter gross domestic product (GDP). Domestic production was estimated to have fallen 6.1 percent, far worse than consensus expectations for a 4.6-percent decline. The Federal Reserve (the Fed)—believing that inflationary pressures are limited and that an accommodative policy stance remains appropriate in response to subdued economic activity—voted unanimously on April 29 to keep its target federal funds rate at near zero percent. Further, officials reiterated their intent to keep rates “exceptionally low” for an extended period and that they remain open to increasing the scope of programs to purchase mortgage-related and Treasury securities as a means to keep a lid on borrowing costs.

Increased appetite for risk
In a dramatic reversal from the market’s downturn—when Treasuries offered one of the few safe havens and most risky assets fell dramatically in unison—renewed optimism and the ensuing surge of buying activity boosted the performance of risky assets of all types. Large-cap domestic stocks, as measured by the Russell 1000 Index, rose 10.12 percent in April. The small-cap Russell 2000 Index and the Russell Midcap Index rallied 15.46 percent and 15.37 percent, respectively. Generally at the more volatile end of the fixed income spectrum, high-yield bonds, as measured by the Barclays Capital U.S. Corporate High-Yield Index, gained 12.1 percent for the month.

Paradoxically, short-term U.S. Treasuries—the choice for investors seeking to escape market volatility—were among the worst-performing assets last month, as the Barclays U.S. Treasury 1–3yr Term Index fell 0.15 percent.

The great debate
The great debate at present is whether the recent market resurgence is an appropriate response to improving economic fundamentals or a meteoric burst of optimism that will eventually flame out if the anticipated economic revival fails to fully materialize. At a minimum, however, it serves to reinforce the tenet that markets are unpredictable, and successfully identifying market tops and bottoms remains an elusive goal for most. It would also seem to weaken the argument of those who claimed the financial sky was indeed falling. For now, at least, the pace of economic decline appears to have slowed.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The Russell 1000® Index measures the performance of the largest 1,000 companies in the Russell 3000® Index. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000 Index, which represent approximately 25 percent of the total market capitalization of the Russell 1000 Index. The Barclays Capital U.S. Corporate High-Yield Bond Index is a market value-weighted index covering the U.S. noninvestment-grade fixed-rate debt market. The index is composed of U.S. dollar-denominated corporate debt in industrial, utility, and finance sectors with a minimum $150 million par amount outstanding and a maturity greater than one year. The Barclays U.S. Treasury 1–3yr Term Index measures the performance of short-term government bonds issued the U.S. Treasury. The index includes 2-year and 3-year notes.

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Adam Brooks, Daniel Evans, & Jared Pearson are financial advisers practicing at Brooks Financial Advisors, LLC, 1567 SW Chandler Ave, Suite 102, Bend, OR 97702. They offer securities and advisory services as registered representatives of Commonwealth Financial Network®, a member firm of FINRA/SIPC. Brooks Financial Advisors is a Registered Investment Adviser. They can be reached at 541-330-6411 or at brooksfinancial@bendcable.com.

Authored by John Blood, CFA, chief market strategist, at Commonwealth Financial Network.

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