March Market Commentary: Continued Improvements in U.S. Economic Indicators Provide Further Boost to the Markets
By Natalie Trunow, Chief Investment Officer, Equities
Calvert Asset Management Company, Inc.
Markets continued to rebound for the month of March, with the S&P 500 and Russell 1000 indices returning over 5% for the month, reacting to the signs of economic recovery. All economic sectors of the equity markets posted positive returns with economically sensitive stocks in the Materials, Financials, Consumer Discretionary, and Industrials sectors leading the markets with returns ranging from 8% to 9%.
During the month and the first quarter, the long-awaited signs of marginal improvement in the consumer sector became more apparent. New economic data released indicated that consumer credit and spending increased more than forecast, sending the markets higher. Auto loans and retail sales showed healthy increases, although spending on big ticket items has yet to recover. Consumers have been stepping up some of their delayed purchases, particularly in the IT sector, helping to boost profits of software companies.
However, the Consumer Confidence Index remained unchanged for the month as unemployment increased in 27 U.S. states, while national unemployment remained at 9.7%.
The Obama Administration has actively been taking measures to combat the stubborn unemployment rate. President Obama signed into law a historic healthcare bill which will allow for tax credits to small businesses for offering health insurance. These tax credits are expected to boost hiring by small businesses, which would be a welcome development. The President also signed into law an $18 billion jobs bill which will give incentives to employers to hire unemployed workers through the end of 2010.
The overall real estate market continues to be quite weak, with the possibility of a double-dip in the housing market likely. New permits and housing starts data during February were negative, while the median cost of existing homes decreased to May, 2002 levels, with further downward pressure on home prices likely later in the year once mortgage debt purchases and the government tax credit for homebuyers expire and if the pace of foreclosures remains high. Foreclosures are expected to climb to 4.5 million in 2010 from 2.8 million in 2009. To battle the negative environment in the housing market, the Administration is proposing programs to help U.S. homeowners avoid foreclosure using funds from the $700 billion Troubled Asset Relief Program.
Corporations are still hoarding cash. Total cash on corporate balance sheets is approaching a trillion dollars and is at levels that are close to 50% higher than historical averages. Some stronger companies that came out of the recession unscathed are looking to use this cash for mergers and acquisitions and take advantage of some of the attractive assets and distressed sales that are becoming available. As a result, we have seen a pick up in the merger and acquisition activity during the month and the first quarter and believe that overall M&A activity worldwide is likely to pick up pace this year. To name a few M&A developments during the month, Prudential announced that it will buy the Asian life insurance unit of AIG for $35.5 billion in cash and stock, with the goal of building market share in the region. Japan's second largest drug maker Astellas Pharma announced a bid for OSI Pharmaceuticals, and Pfizer is bidding for German generic drug maker Ratiopharm.
Most economic indicators looked promising during the month and the quarter. Inflation in the U.S. remains in check despite record domestic deficit spending as continued credit constraints, as well as dampened demand for credit, exert downward pressure on prices. The Fed re-affirmed its pledge to maintain low interest rates. The U.S. dollar has seen some benefit from the incremental improvement in the economic outlook for the U.S., particularly as the recovery in Europe appears on shaky ground.
In addition to Greece, Portugal’s fiscal health has also been called into question. Fitch downgraded Portugal's sovereign rating, re-igniting investor anxiety around sovereign debt risk. The Greek government announced additional budget cuts during the month, helping ease concerns surrounding the country's sovereign debt risk and helping prop up Greek bonds. France and Germany expressed support for IMF aid for Greece, which helped re-invigorate the euro.
In emerging markets, China and India are tightening their monetary policies and facing accelerating inflation. Having regained most of the post-crisis declines, emerging markets (despite higher economic growth rates) may now be somewhat more vulnerable relative to the developed markets, particularly the United States.
While the possibility of a double dip in the housing market, the large fiscal deficit after multiple stimulus bills, and the stubbornly high unemployment rate are of concern, we remain optimistic that the economy will continue to improve in a gradual, smile-shaped pattern.
This commentary represents the opinions of its author as of 4/1/10 and may change based on market and other conditions. The author’s opinions are not intended to forecast future events, guarantee future results, or serve as investment advice.
Calvert Asset Management Company, Inc., 4550 Montgomery Avenue, Bethesda, MD 20814