Market Summary

The Fed's decision to open the discount window to non-bank financial institutions has put a floor under the markets, at least for the time being. It is clear that there is now little risk that even a medium sized bank-like institution will be allowed to fail, let alone a large one, so the market volatility related to the risk of systemic financial system failure has abated. Debate rages about the wisdom, even legality, of the Fed's action, but it has restored confidence for now. This has allowed the S&P 500 to gain 9% from its intra-day low on March 17. Almost half of that (4.2%) was gained in the last week. The NASDAQ Composite has also seen an over 9% gain with a rise of 4.9% this week.

The markets seem to be trading on the implicit assurance that the Fed and the President's Working Group on the Financial Markets ("PPT") will support the markets in this election year (as we have predicted since last August 4) and are also relying on assurances that the economy will recover in the second half of this year. In this environment, technical analysis is of doubtful value but we note that the S&P 500 ( and other indexes also) have established a double-bottom and are approaching their pivot point. A breakout above 1396 for the S&P 500 would be bullish but the index must first overcome resistance at 1388.

While the market technicals are improving, the economic fundamentals are worsening. Friday's employment report showed a loss of 80,000 jobs in March and the third monthly decline. This number will probably be revised lower next month, just as February's were today. The figures include a gain in Government employment so the private sector loss was 93,000. Approximately an additional 100,000 are eligible to enter the work force each month so clearly unemplyment will rise beyond the 5.1% reported today. Paradoxically, this is good news for stocks because rising unemployment holds down wages. This improves a company's bottom line, as will the cost of debt servicing as interest rates fall. A further 05% cut in rates on April 30 will be more good news.

So in the short term, it seems probable stocks will rise but earnings season begins on Monday which will determine if the rally continues or sputters.

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