Quote of the month. “Discovery consists of seeing what everybody has seen and thinking what nobody has thought.”– Albert Szent-Gyorgyi

 

The month in brief. If the economy was downtrodden, the stock market sure was upbeat – at the end of April, blue chips were wrapping up their best two months since 2003.¹ As headlines and nightly news relayed anxiety about banks and automakers, Wall Street advanced powerfully. The three major indexes gained between 7.3 and 12.4% in April.² Statistics indicated gloom, but confidence returned to consumers and investors.

 

Domestic economic health. New concerns about the viability of automakers and the capitalization of banks surfaced; in April, Wall Street rode through these concerns remarkably well. The big news, of course, was Chrysler LLC entering bankruptcy proceedings April 30 at the instruction of the White House. Fiat said yes to a partnership and a 20% stake in the U.S. automaker, but Chrysler bondholders (notably about 40 hedge funds) said no to slashing $6.9 billion in debt to $2.25 billion.³

 

The Federal Reserve unveiled some details about bank stress tests in late April. The tests were evaluations: could 19 major U.S. thrifts potentially survive two financial scenarios, or would they need more capital to do so? Scenario one assumed a 2009 with -2.0% GDP, 8.4% unemployment, and a 14% drop in home prices. Scenario two plugged in -3.3% GDP, 8.9% joblessness and a 22% decrease in home values.⁴ We get the results May 7. Any undercapitalized banks will be directed to sell assets or draw on private-sector sources of capital before turning to the government.⁵

 

As for consumers, the latest rounds of data showed them spending a bit less, but also far more confident. Personal spending and personal income respectively fell 0.2% and 0.3% in March; disposable income was flat.⁶ Retail prices and retail sales were down in March: the Consumer Price Index decreased by 0.1% and the Commerce Department had retail sales slipping by 1.1%. Producer prices also fell 1.2%. CPI dropped 0.4% and PPI fell 3.5% from March 2008 to March 2009 - the first year-over-year drop in CPI since 1955 and the biggest 12-month fall in PPI since 1950.^7,8 However, the numbers from the consumer confidence indexes were certainly something to smile about: the Reuters/University of Michigan index came in at a final April level of 65.1, its biggest gain in two years.⁹ The Conference Board’s April survey hit 39.2, trouncing the 29.7 figure economists polled by Bloomberg News had expected.¹⁰In other news, unemployment climbed to 8.5% in March.¹¹ The Fed said GDP for the first quarter was pretty miserable: -6.1%. However, the Fed also reported that consumer spending did not contract, maintaining a 2.0% annualized pace last quarter.¹² The Fed left interest rates alone.¹³

 

Global economic health. In Asia, there was some optimism. Yes, Japan’s unemployment rate reached a four-year peak in April (4.8%) with job availability at its lowest level since 2002.¹⁴ However, Japan’s industrial output rose for the first time in six months in April, and its central bank forecast growth in 2010. China’s manufacturing purchasing manager’s index rose for the fifth straight month in April.¹⁵ South Korea’s export earnings increased for the third straight month and its trade surplus set a record for the second consecutive month.¹⁶

Unemployment rose to 8.3% in Germany and 8.6% in France, but confidence in the euro area increased for the first time since May 2008 in April.¹⁷ Retail sales in the Eurozone contracted by the least in 11 months in April, and Germany’s government forecast that its economy would grow next year.¹⁸

 

World financial markets. We saw gains across the globe – tremendous gains. The MSCI World Index was up 10.9% in April – its best month since January 1987. The MSCI Emerging Markets Index rose 16.3% last month, and that was its hottest month since December 1993. 

In Europe, the DAX gained 16.8% in April, and the CAC 40 rose 12.6%. England’s FTSE 100 gained 8.1%, and Ireland’s ISEQ rose 19.5%. In Asia, the April data: Hang Seng, +14.3%; Shanghai Composite, +4.4%; Sensex, +17.5%; Nikkei 225, +8.9%; Singapore Straits Times Index, +13.0%; Australian All Ordinaries Index, +6.0%.¹⁹

 

Commodities markets. Oil had a mediocre month (-0.49%) but continued a strong year (+14.62% through April 30). Gasoline futures rocketed up 38.81% in April, and one metal had an even better month: copper futures soared 45.60%. Gold rose 0.78%, silver 8.94%, platinum 17.54% and palladium 15.63% in April.

As for crop futures, orange juice (+22.61%) and sugar (+21.76%) led the way with milk last (-33.42%). It was a good month for soybeans (+7.65%), but not for wheat (-12.16%), rice (-14.10%), corn (-0.86%), or oats (-3.33%).²

Housing & interest rates. The March numbers weren’t very encouraging. The Commerce Department said new home sales fell by 0.6% for the month, and the National Association of Realtors reported residential resales down by 3.0%. However, the inventory of unsold new homes shrank from 12.5 months worth to 10.7 months worth across the first quarter of the year.²⁰

 

Rates on conventional mortgages finished April down more than a percentage point from a year ago. 30-year FRMs ended the month averaging 4.78%, according to Freddie Mac; 5-year ARMs averaged 4.80%, 1-year ARMs averaged 4.77%, and 15-year fixed-rate loans averaged 4.48%.²¹

 

Major indexes. Stocks had an outstanding month. At the end of April, the S&P 500 had racked up its best two months since January-February 1975.² In fact, April 2009 was the S&P 500’s best month since March 2000, and the NASDAQ wrapped up the month with its eighth straight winning week – that hadn’t occurred since December 1999.¹⁹

 

 

Source: cnbc.com, 4/30/09²

 

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.

 

May outlook. On Thursday, May 7 (after the markets close), we are supposed to learn the results of the stress tests. The government has put itself in a difficult place: if it reveals too much, the markets might react too wildly, and if it reveals too little, that could breed suspicion or pessimism. Now of course, the results could surprise us all and not be as bad as anticipated. Or they could be worse than presumed.

Pessimists say that the stock market ignored economic reality in April. Optimists see the potential for great gains across the balance of 2009. In fact, Anthony Bolton, Fidelity International’s president of investments, recently told Bloomberg Television that “All the things are in place for the bear market to have ended.”¹⁸ Let’s hope he’s right.

 

Here are the key economic releases across the rest of May: the April ISM services index (5/5), the stress tests results (5/7), April unemployment and March wholesale inventories (5/8), April retail sales and March business inventories (5/13), April PPI and core PPI (5/14) April CPI, core CPI, industrial production and preliminary May consumer sentiment (5/15), April housing starts (5/19), April durable goods orders and the Conference Board’s May survey of consumer confidence (5/26), April existing home sales (5/27) and April new home sales (5/28). (The April personal spending and personal income numbers come out on June 1.)