As usual, March came in like a lion and went out like a lamb. But in April the market came in acting like a bear and went out more like a bull, exhibiting the continued strength and momentum of this cyclically bullish market. The major indexes continue to climb higher, and our model portfolios reflect this trend—all but our most conservative portfolios continue to grow faster than the Dow Jones Industrial Average and the broader S&P 500 Index.
Tuesday’s most active stocks included: Lucent Technologies (NYSE: LU), Nortel Networks (NYSE: NT), Pfizer (NYSE: PFE), Time Warner (NYSE: TMX), iShares Japan Index Fund (AMEX: EWJ), General Electric (NYSE: GE), iShare Russell 2000 Index (AMEX: IWM), and Energy Select SPDR (AMEX: XLE).
Nevertheless, the Dow had its best first quarter since 2002, which could be an indication that blue chips are finally returning to favor after spending five years mostly in the doldrums, even during the bull market of the past three years. The S&P 500 had its best start in seven years, and the NASDAQ, its best first quarter since 2000. Indexes of mid-cap stocks did even better.
Three years ago, with investors worrying about the possible invasion of Iraq, most market indexes hit their low point on March 11, 2003. In the three years since then, we’ve had a sustainable upward trend. As of March 31, 2006, the S&P 500 and the NASDAQ have gained more than 50 percent and 70 percent, respectively. All along there have been analysts looking for the market to turn flat or head south, and some investors shed stocks in favor of bonds or other low-risk options. This was obviously premature, given that the market continued to appreciate.
Other analysts, however, who rely on a valuation system can point to plenty of stocks selling at levels below their intrinsic value. In other words, there are still good investments out there. And I still tend to support this school of thought. Try not to let market jitters get the best of you. By following our model portfolios, I believe you can benefit from the opportunities that exist in today’s market.
Much of the economic and financial discussion in March was focused on bonds and interest rates. And in one respect the market got exactly what it wanted last month: consistency. Last fall, stocks received a boost from the expectation that the new Federal Reserve chairman, Ben Bernanke, would not diverge significantly from the policies of his predecessor, Alan Greenspan. But now they are paying a small price in the short term—more restrictive monetary policy than investors would prefer. In March, Bernanke presided over his first meeting as chairman, and the Federal Open Market Committee raised its target to 4.75 percent, a level not seen since April 2001. This is the 15th consecutive increase since interest rates bottomed in 2003. More important, the Fed stated that it anticipated strong economic growth during the most recent quarter and hinted that additional interest rate hikes may be necessary.
This put a small damper on stocks at the end of March due to the delicate balance of providing an environment in which economic activity can flourish and not producing unnecessary inflation. Although I expect that this balancing act will be the recurring theme for the next several months, it should not cause alarm until the underlying data indicate otherwise.
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