Saturday, May 5, 2007

News - April 2007

Who says the number 13 is unlucky?!? The DOW reached the 13,000 milestone for the first time ever, closing April 30th at 13,063, up some 5.5% for the year and only six months after surpassing the 12,000 mark. For the fist four months of the year, the market rise has been very methodical, save for the blip during the last week of February. Volatility, which started the year at low levels, has become very tame again over the past couple of months after reaching the lows in March.

That said, these benchmark numbers are just figures and do not represent a justification for the value of the market. It’s important to judge stock prices on a variety of economic and financial assessments. What profits the overall market will earn is obviously the most important figure when valuing the market. The next step is to evaluate those earnings against a number of other metrics, including inflation, the current interest rate environment and the growth potential for the economy. Based on many of these comparisons, stocks still appear very fairly valued – not extraordinarily inexpensive, but also not significantly overvalued either.

The better than expected growth in earnings for the S&P 500 has been the most recent source of optimism, pushing the markets to new highs in the case of the DOW and multi-year highs for the S&P 500 and the NASDAQ. Analysts had been expecting around 3% profit growth over last year, but those expectations proved to be too conservative, in part aided by a weaker dollar which helps those multinationals with operations outside of the U.S. As the 1st quarter earnings reporting season draws toward a close, the earnings have been roughly 7% to 8% higher than last year for the S&P 500 companies. Simple concepts are at work here: the more money a company makes, the more it should be worth, right?

All of the DOW’s gains were achieved during this past month as the average surged 5.7% during the month of April alone. The S&P 500 climbed 4.4% for the month and the NASDAQ rose 4.3%. The small cap stocks as measured by the Russell 2000 Index gained a less stellar 1.8% for the month of April.

As always, certain sectors outperformed the broad market and there were also some underachievers. The Industrial Materials, Utilities, Telecom and Healthcare sectors all bettered the broad market. Real Estate and Financials are the notable underachievers, probably in sympathy with the well publicized sub-prime mortgage problems and real estate valuation apprehension. One thesis for some of the recent stock market strength is that, as investors become more apprehensive about investing in real estate, they look to stocks as an alternative to invest their capital.

The housing sector does continue to be a source of concern about the overall economy, although those concerns have yet to materialize. Consumers continue to spend more, although the pace of that spending growth is expected to be a bit slower for the rest of the year. Countering the troubles with the housing market, which many economists predicted would slow spending more significantly, is the data suggesting that incomes are growing at a faster rate, which should bolster spending. Unemployment remains low at 4.5% for April, although that figure is slightly higher than the 4.4% number released for March.

Overall, there is certainly a mixed bag on the economic front. With GDP growth slowing to a preliminary annualized rate of 1.3% for the 1st quarter, stocks may be hard-pressed to sustain the appreciation we have seen over the past nine months. We believe that as world economies are increasingly cooperative, our investments become less dependent on the rate of growth within the U.S. economy. Many, if not most, of the companies in which we have allocated investments have operations beyond our nation’s borders. The fact that international economies continue to increase their rates of economic expansion, including Europe, gives us confidence investing in the equity markets.

Thank you again for visiting RollinsFinancial.com. We hope this update has been useful to you. Please email us and provide us with your thoughts and comments.