April 2009 Recap

The S&P 500 finished higher for the second consecutive month as the market embraced the notion that the economy is transitioning from extreme duress to merely bad. Nearly all asset classes posted gains in April, the exception being commodities, with the biggest gains coming from small cap, emerging markets, and REITs.

Changes to the fair-value accounting standards as well as better-than-expected earnings reports helped deter the market’s attention away from a 6.1 percent decline in first-quarter GDP, stress tests on the nation’s 19 largest commercial banks, Chrysler’s bankruptcy, and the swine flu breakout.

All sectors in the S&P 500 finished the month higher. Defensive sectors such as utilities, telecom and consumer staples lagged as investors favored early-cycle industries. Beaten down sectors including financials, consumer discretionary, and industrials were the best performering sectors in the S&P 500 this month.

Financials soared after the U.S. government claimed the vast majority of banks are adequately capitalized, signaling to investors that the banking system crisis is on the mend – although this may be more hope than reality. Technology shares continued to climb steadily, with several bellwethers declaring demand has bottomed and they will return to growth as buyers restock inventories. The tech-heavy NASDAQ is up 9.26 percent year-to-date.

REITs were the best performing asset class in April, as these debt-laden trusts began slashing dividends and issuing new equity to shore up their balance sheets. The changes to fair-value accounting rules may also have lifted sentiment since lenders are provided with regulatory capital relief, which in turn frees up more capital and makes it easier for REITs to get financing.

The Fed’s efforts to lower Treasury yields were derailed by fears that their $300 billion in purchases would not be enough to dampen the $4 trillion in new supply expected to come in 2009-10. The Street anticipated the Fed to increase their buying target at the April 29 FOMC meeting, but were greatly disappointed when the Fed didn’t budge.

The yield on the ten-year rose 46.5 basis points in April to its highest level since November 2008.

Peter Lazaroff, Junior Analyst