Permanent Value

Weekly Update: April 5- 9, 2010

Michael La Salle
April 9th, 2010

Dow Closes Just Below 11,000

Stocks closed higher for the sixth consecutive week as the Dow Jones Industrial Average gained 0.64% and the S&P 500 gained 1.38%.  This comes as 10-year treasury yields rose above 4% for the first time since June 2009 and the Dow Jones Industrial Average touched briefly above 11,000 for the first time since September 29, 2008.  The European Union agreed on a support plan for Greece on Friday, announcing the details will be ironed-out Friday evening.

In economic news, pending sales for existing homes gained 8.2% month over month in February signifying strength in the U.S. housing market ahead of the home buyer tax credit expiration in April.  The Commerce Department reported Friday that inventories at wholesalers rose for the first time in three months in February.   Inventories gained 0.6% for the month, 50% higher than the expected rise of 0.4%, indicating companies are increasing orders for increased sales.

In earnings news, Family Dollar Stores, Inc. surprised this week as the discount retailer posted earnings of 81 cents per share, coming in 3 cents higher than analysts’ expectations of 78 cents per share.  Monsanto disappointed as the agriculture company posted earnings of $1.70 per share, 3 cents lower than estimates.

What Opportunities are Ahead?

The big news of the week was the fact that 10-year Treasury yields jumped above 4% on Monday.  The importance of this milestone is it shows that interest rates are on the rise, and a Federal Reserve Board rate hike may be in the near future.

As investors’ confidence increases, investors begin selling their treasuries to move their money to more risky investments, thus lowering the price of bonds and raising their yields.  The money these investors move to riskier investments will be spread over many sectors creating many opportunities for gains.

A study performed by Standard & Poor’s Equity Research Services, showed that in the last 13 rising-rate markets over the last 64 years, the S&P 500 gained an average of 6.2% in the 12-month periods following the first rate hike by the Federal Reserve Board.  More importantly, the study indicates that a few investment opportunities in different sectors.  For example, the information technology sector averaged 20%, health care averaged 13%, and the telecom and energy sectors both averaged 10% in the 12 months following the first rate hike.

If history repeats itself, as it often does, these sectors will be a great place to invest since a Federal Reserve Board rate hike appears to be in the near future.

Market Returns

This Week Year to Date Last Year Last 5 Years
S&P 500 1.38% 7.11% 39.44% 1.11%
Dow Jones Industrial Average 0.64% 5.46% 36.05% 5.12%

Next Week’s Economic Releases

April 13 – International Trade

April 14 – Consumer Price Index, Retail Sales

April 15 – Industrial Production

April 16 – Housing Starts