Yet another ho-hum month in the market, with the commodities soaring and bonds falling, equities managed to hold their own. While we have been calling for a generally weak middle part of the year, the first month of the second quarter actually held up well in the face of negative news. The economic picture remains on the weak side – even though the GDP numbers may indicate otherwise. Housing, confidence and inflation numbers all were moderate and the Fed even indicated that they just might sit one rate hike out – for the first time in nearly two years. The coming week is loaded with numbers to analyze, from employment to factory orders to productivity. This will serve as the last BIG week before the Federal Reserve meeting the following week and should set the stage for a lively discussion regarding how many more interest rates moves are necessary. We have been in the “one and done” camp the last four meetings – so eventually we hope to be right, this time for sure!

The markets finished the month on an uninspiring note, although still higher for the month (the OTC market was actually down slightly). The big winners for the month continued to be international investing, along with small stocks. Up over 5%, international investors have been saying the market is getting frothy as money flows into this area. Back on this side of the oceans, the US markets continue to mark time; awaiting news of something that will arrest the torpor we have experienced for lo these many weeks. While our indicators have been pointing toward a slowing economy and stock market, so far the averages have not followed suit. While we feel pretty confident about what should happen, we must deal with what is happening. The markets remain fairly narrowly range bound, unable to put together a strong series of rallies or declines, with each break above or below perceived resistance being a “false” break and the markets once again trade in the range. When the markets make up their minds, we will let you know, but for now we all will have to watch the grass grow.

Still buried in negative territory, the bond model has given solid signals over the past year, going bearish on bonds at the end of January when the 30-year bond was trading around 4.55%. Today at over 5%, investors are bashing bonds as though the Fed will be raising rates for the next two years. We mentioned last week a signal given by a secondary model we use that the time was ripe and bonds should be bought. The last comparative signal given by this model was in July ’02 just before the 30-year yields fell by 100 basis points over the following year. While we are not calling for that dramatic a drop in rates, we do expect some meaningful decline to back under 5% in the weeks ahead. Of course the heavy dose of economic news this week will have much to say about any decline in bonds.

© 2006 Paul J. Nolte, CFA
Editorial Archive

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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Paul J. Nolte, CFA
Director Investments
Hinsdale Associates
630-325-7100
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