Market Week in Review

S&P 500 1,120.68 +2.48%

Technology and interest rate-sensitive shares led U.S. stocks to their best performance in almost two months last week on falling energy prices, declining interest rates, strong economic reports and an improving situation in Iraq. Even a government warning that al-Qaeda or other terror groups are in the U.S. preparing to launch a major attack this summer could not push equity prices lower. Breadth was much improved as almost every sector rose last week. Stocks were also buoyed mid-week by a government report that showed the biggest increase in corporate profits in two decades and faster first-quarter U.S. economic growth than earlier reported. Finally, global economic optimism got a boost from Asia as Japanese household spending rose a seasonally adjusted 9.3% from March, the largest increase since the survey began in 1975. Job growth sparked consumer spending, which makes up more than half the Japanese economy, Bloomberg reported.

There were several other developments with positive implications for U.S. stocks last week. Medtronic, the world's largest maker of devices that regulate heartbeats, said 4th quarter revenue rose 24%, beating expectations. Swift Transportation, a $1.5 billion trucking company, raised 2nd quarter guidance substantially as a result of getting better trucking rates and strong economic growth. Comcast, the largest American cable company, said it plans to offer digital phone service using VOIP technology to almost all its customers by the end of 2006. Tech Data, a $2.3 billion distributor of technology products, beat first quarter estimates substantially and raised second quarter guidance, citing strength in Europe. Lastly, Novellus, a large semiconductor equipment maker, raised its forecasts for second quarter orders, profits and sales.

Bottom Line: The key takeaway from last week was that investor psychology has changed for the positive. Psychology has been the main culprit weighing on U.S. stocks as the underlying fundamentals are excellent. Stocks are cheaper now than in 1987 and 1994, years preceding major bull runs. U.S. stock valuations are down 40%, and falling, from their peaks during the bubble of the late 90's. During that period most stocks were declining while a few were soaring. Currently, most stocks are rising while only a few are falling. Corporate accounting is much more conservative and trustworthy than during the 90's. As well, inflation and interest rates are now significantly lower than during those time periods. In 1987 the 10-yr T-note yielded close to 10%, in 1994 it yielded 8% and today the yield is 4.65%. Corporate profits are at all-time highs and are accelerating at the fastest pace on record. As profits soar, companies are boosting production and hiring more workers. U.S. economic growth is the best since the early 80's. American's net worth is at all-time highs as the housing market will hit another record high this year, notwithstanding higher rates and energy prices. All these many positives have been forgotten as the mainstream press focuses intensely on the few negatives. However, with interest rates falling, energy prices declining and Iraq improving it will be much harder for the media to constantly make the negative argument for the Bears.