This week, the major indices suffered a hit of about 2% on Tuesday. On Friday, they attempted to regain some lost ground, but ended with a weekly loss of about .7%.  The unemployment rate rose more than expected to 9.7%, but job cuts were down to 216,000 last month compared to July’s 276,000. The mixed report reflects that while there is continued improvement, we are not out of the woods yet.

In recent months, there has been significant movement of money into bonds.  Part of this increase in demand owes to the general belief that the Federal Reserve will successfully maintain inflation at currently low levels.  However, we find this idea to be misguided.  We expect inflation to return to more “normal” levels in the next few years.  Similarly, interest rates will increase, and those who have purchased bonds will be stuck with their bonds, unable to take advantage of new, higher rates.

Highlights next week include consumer confidence and, as always, weekly claims.

Last week tied up a respectable 38-point gain in the Dow, with similar percentage gains in the S&P and NASDAQ. While the Dow ended the week on a flat note, one day does not a trend make.

In the second quarter, the S&P returned 15%.  This quarter looks to have a similar result if the recent leanings toward growth continue.  Despite these gains, we are still well under the old peaks in the market, giving plenty of room into which to grow. As the market continues to be stable, one may reason that all those who got out of the market will get back in, as there is still a lot of money that was taken out and has not come back in.  Only 15% of investors are fully back into the market.  Bringing in the rest should drive up demand and, inevitably, prices.

However, only 20% of current investment letters are bearish. It can be argued that all money that is going to return to the market is back already, and we should not count an influx of money to bolster stock values. We continue to go forward with caution, but continue to look for opportunities to take advantage of the current market trends.

There was an impressive boost in the markets last week, with the Dow Jones up 181 points, or 2%, over the course of the week. Many investors seem to be willing to reintroduce risk to their portfolios, moving away from money market fund investments in search of higher returns.  Despite the good news, the lack of any movement in raising rates from the Fed comes as no surprise as they are cautious in instigating any sort of decline.

As stocks lead the general economy, we expect other economic indicators to pick up in kind in the coming months.  An area of concern is “long-tailed” businesses.  Developers of commercial real estate, for example, must plan their projects months or years before they are to be completed.  If one of these companies planned a project in 2007, it may be just now nearing completion. Since the company likely would not have made any plans in mid-2008, there is nothing “on deck” to begin this year or next.  This may lead to a lag in such businesses during the rest of the economy’s recovery.  However, such businesses will begin planning new projects along with others, though there may be some delay in their coming to fruition.

The market appears fairly valued. We do not anticipate the market will continue to rise at the same pace. However, it is not out of the question that the market will move higher.

There was another pullback this week (the fourth consecutive), after a relatively steady, significant increase from the March 10th lows. The Dow was down 1.6%, the S&P 500 1.9%, and the NASDAQ 2.3%. Year-to-date, the Dow and S&P are still negative, down 7.2% and 2.7%, respectively, and the NASDAQ remains positive with an 11.4% year-to-date gain.

In commodities, the price of gold has decreased, down to a little over $900 per ounce. Oil prices have also decreased to $60, back down to where they should be — between $45-65 a barrel. The federal funds rate has also dropped to 0.16%, down more than 10 basis points from just two weeks ago.  The market is no longer pricing in a rate increase.

Though it was a short week due to the observation of Independence Day, it did not lack in the amount of economic data the market had to contemplate. The most important number was unemployment, which came out on 7/2. The numbers were very disappointing, and the market fell hard because of it. That drop put the domestic indexes, the Dow, the S&P and Nasdaq, unchanged for the week. Quarter-to-date, they all showed positive increases as well, at 11%, 15.2%, and 20%, respectively. The Dow continues to be negative year-to-date (-3.8%) while the S&P is positive at (1.8%) and the NASDAQ powers ahead of all of them with a strong year-to-date gain (16.4%).

The yield of the 10-year Treasury bond was up by 2 basis points from last week, and it was the best quarter for equities since the late nineties. But with the announcement of consumer confidence and unemployment numbers, both of which took a dip, there was a negative market reaction late Wednesday into Thursday. After the steady January-May decline in the number of jobs lost, that number rose in June, for the first time since 2008. The unemployment rate reached 9.5%. Figures, unfortunately, were worse than we had expected, but there may still be signs for a economic turnaround later in the year.

It was a flat week for the S&P 500, though the Dow dropped by 1.2%. Year-to-date, however, the S&P is positive (+1.7%) and the DJIA negative (-3.9%). The NASDAQ continues to soar above the other indexes, up 16.6% year-to-date. Foreign markets are also doing well, due to their connection to commodities and the dollar.

The bond market continues to be volatile as rates are moving down again. Treasury yields have dropped, as the Fed stays aggressive on inflation: the current yield of the 10-year Treasury bond is 3.50%, compared to the June 10th close at 3.98%. There is a real concern of an impending wave of inflation, as well as higher taxes, due to concerns about federal spending. These issues are driving the bond market’s volatility and will continue to do so for the coming weeks.

Investors face a shortened week due to the 4th of July holiday. It is not short on data, though — the big numbers we are watching are consumer confidence, due out Tuesday; ISM data, due Wednesday; and unemployment, out on Thursday. Each of these series is important to consumer spending and will certainly drive the markets in the short-term. We predict they will be better-than-expected.

At the close of Monday, June 22nd, the S&P 500 was down 1.1% year-to-date while the Dow Jones Industrial Average was down 5% year-to-date. So far this quarter, however, both reported positive increases: the S&P was up 11.9% and the DJIA 9.6%. The NASDAQ year-to-date showed an increase of 12%, down from last week’s 17.5%. After a very aggressive upward move off of the March 9th lows, the markets appear to be taking a breather. World-wide economic growth and recovery are currently being questioned.

While foreign markets are doing well, the current yield of 10-year Treasury bonds is 3.69, down significantly from the 3.98 we saw earlier this month. The prices of gold and oil are down as well, with oil dropping from the low 70s to the high 60s. But with the number of new home starts up and the number of weekly unemployment claims stabilizing, the economy seems to be showing signs of life.

At this point, we really need the government spending programs to actually kick in. Though the money has been appropriated, very little has been spent; for economic growth to really begin, this money needs to work its way into the economy. Until then, we should be in a trading range for stocks.

This week, the S&P 500 was up 0.8%, and the NASDAQ was up 1.5% with a notable year-to-date increase of 17.5%. In the NASDAQ, consumer discretionary stocks, surprisingly, have exhibited the most change year-to-date, with a 35.7% increase; technology is next with a 25% increase.  Energy continues to perform well this year, as the price of oil topped $70 per barrel this week.  We think oil should trade between $40 and $60 per barrel, so the price may be a little ahead of itself.

10-year Treasury bonds made a significant jump this week, touching 4% and returning to approximately the 2008 year-end rates; yields have increased dramatically in a short period of time. This is due, in part, to what seems to be a stabilizing economy: weekly unemployment claims dropped to just above 600,000, from almost 700,000, and consumer confidence rose as well.