Friday Market Thoughts

It's pretty quiet in the office today.

It's Good Friday, which means the stock market is closed. The bond market was open briefly for a few hours this AM so that traders could react to the monthly unemployment report, but now that is closed also.

So today I'm mostly working on getting my thoughts together for my quarterly letter. Here's some of the key points I'll probably be discussing:

• For the fourth consecutive quarter, stocks outperformed bonds, which represents the longest "win streak" since the seven quarter winning streak in 1996-97 (according to Ned Davis Research). Still, an unofficial poll of my clients would suggest that no one feels like we're in the midst of a new bull market;
• Interest rates were essentially unchanged. The 10-year Treasury bond yield started the year at 3.83% and ended the quarter at 3.84%. Again, all I am hearing is that interest rates have to begin to start to rise soon (even though I don't necessarily agree);
• The emerging markets were the global stock market laggards, while the U.S., Japan and the U.K. were the leaders, illustrating that economics and stock markets don't always move together;
• Corporate bonds - especially lower quality bonds - were hugely popular, demonstrating that investors have put the credit crisis firmly behind them, and are grabbing any yield they can;
• The worst performer across the asset classes? Cash.
  

So the Big Question is: What to do now?

I still think we could continue to rally - maybe another 10% or so more - and then we'll have to take a look. There's too much cash on the sidelines, interest rates are too low, and there's too much pessimism for stocks to have a serious correction baring an unexpected global economic event.

Still, I do agree in one way with the consensus in that I don't know how the economy can suddenly turn robust given the high unemployment rates and huge debt burdens at the government and consumer levels.

Final thought: I ran across this quote from Steve Galbraith, formerly chief investment strategist at Morgan Stanley and now partner of Maverick Capital. Steve was giving a talk at a conference sponsored by Grant's Interest Rate Observer in New York last month:

"Starting and endpoints matter," he said, pointing to a graph of S&P 500 returns over the past 75 years, "and we started from a ridiculously blown-up level. But the reality is, even with the rally we've just had in the markets, this has still been the second-worst decade ever for stocks. And I'd much rather be investing now than 10 years ago."