Calvert  News & Commentary

April Market Commentary: The U.S. Equity Market Rallies Despite Mixed News

5/6/2009

Untitled Document

By Natalie Trunow, Senior Vice President, Head of Equities
Calvert Asset Management Company, Inc.

Natalie Trunow, Head of Equities

U.S. equity markets strengthened in April largely fueled by better-than-expected earnings reports. For the month, the S&P 500 Index rose 9.39%. During April, the Fed was a net purchaser of long-term government bonds and launched a program to revive lending, in an effort to prevent consumers from retrenching again. Consumer confidence improved, helping consumer discretionary and industrial stocks to the tune of about 19%. Home price deterioration slowed as home sales stabilized, sending real-estate development names up 62% for the month.

In terms of negative developments, at the end of the month, the Commerce Department released its advance estimate of the first quarter’s GDP growth, showing a significantly worse than anticipated 6.1% decline. Troubles in the automotive sector intensified as General Motors was threatened with bankruptcy. Chrysler did file for bankruptcy at the end of April and continued to move toward a deal with Fiat. Despite the struggles of the U.S. automakers, the continued job losses, the possibility that banks will need more assets following government stress-tests, and the threat of a flu pandemic, markets continued to rally.

We believe the market’s optimism was due in part to better-than-expected earnings reports—achieved largely through severe cost-cutting by businesses. This optimism persisted despite the fact that top-line numbers for the first quarter came in below analysts’ estimates for a majority of names, reflecting continuing decline in global economic activity. Signs of improving economic activity were seen in China, however, as that government’s stimulus package had a positive effect on domestic manufacturing.

In the financial sector, changes to the mark-to-market accounting rules by the Financial Accounting Standard Board (FASB), allowing banks to mark their distressed assets to internal models rather than to fair value, boosted shares of financial companies, which had been weighed down by steep losses in their portfolios of mortgage-backed securities.  As a result, banks were some of the best performing stocks in the market during the month, with the sector up 28%. The FASB’s rule changes, however, will limit transparency for investors and will likely result in banks being more reluctant to sell their distressed assets into the Treasury Department’s Public-Private Investment Program at market-clearing prices.

In the midst of improving credit markets in April, the Treasury Department warned that banks had reported “significant declines” in commercial and industrial lending and in consumer loans, including credit card debt. During the course of their stress tests, Federal banking agencies increasingly focused on the quality of bank loans, and the wide variations in underwriting standards, in determining the health of the banks under review.

Given the non-recurring nature of some of the bank revenue increases in the first quarter, as well as the impending risks of the stress tests, we believe it is likely that the 70% rebound in financials, and the 29% rise in U.S. large-cap stocks (as measured by Russell 1000) since the low of March 8th, may have gone too far too soon. But if we continue seeing improvement in consumer and housing data, longer-term economic recovery will become more certain.



#9001 (5/09)

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