Stocks had another nice set of gains this week, despite a loss Friday.   We also briefly crossed the much-coveted 10,000 mark in the Dow, though it is a psychological mark only.  The Dow was up 1.33%, the S&P 1.51%, and the Nasdaq .82%.  For the year, we are now up 14%, 21%, and 37%, respectively.

Retail sales fell 1.5% last month, versus an expected 2.1% loss. We are in the undesirable position of celebrating a mere 1.5% loss in retail sales.  Initial jobless claims, too, fell to lower levels, now at their lowest since January.  Again, we celebrate a paltry half-million people filing their initial jobless claims. We look back at 2007, when 350,000 was considered very high.

The S&P 500 index is now trading at about 15 times 2010 earnings.  Under normal circumstances, this would be a clear sign of undervalued stocks, and we would expect to see a quick return to a 20-times level, given where we are in the economic cycle.  However, with unemployment reaching 10% and interest rates at or near 0%, the economic environment is anything but “normal.”  We expect to see a return to historic valuation levels- but not before these other wrinkles are ironed out.

Money continues to flow into bonds, while money market funds and equities continue to have negative flows.  This is surprising, as we believe we are primed for a correction in the bond markets.  It is predominantly professionals coming out of money market funds, while mutual funds are dominated by individual investors. The “average investor” can, as usual, be relied upon to show us what the wrong move to take is.

Next week is a relatively light one in economic news; the main focus is housing numbers that will be released.  Of course, we will also have an update in weekly claims.  Earnings reports will take the main stage, and will certainly drive the market next week.  For those companies reporting, we expect generally positive results.