One of the most anticipated times of the year here in Washington, D.C., is the blooming of the cherry trees along the Tidal Basin near the Jefferson Memorial, as well as other surrounding areas. I always think of the emergence of those pink blooms as the sign that spring is officially here. The peak bloom is usually around April 1, but given this winter’s unusually warm temperatures, the trees may hit their peak a week early.
The stock market also bloomed early this year, jumping right out of the gate the first week of January and moving up at a 45-degree angle for two straight months before digestion of gains set in. The S&P 500 began the year at 1,260, and it trades today near 1,370, resulting in a healthy 9% gain year-to-date.
It should be of no surprise, then, that the current bout of consolidation has arrived — and with it some volatility resulting in last week’s 200-point sell down on Tuesday. That was the biggest one-day pullback of the year, rekindling recent memories of the wild tape action we all endured throughout 2011. Memories of grinding higher to earn nickels and dimes, only to give it back in 100-dollar bills, are fresh in the minds of investors.
This year, however, has quite another look and feel to it. There is much more clarity about how the European Central Bank and member nations are dealing with the sovereign credit crisis, which has led to the orderly Greek debt swap.
The BRIC countries — Brazil, Russia, India and China — are in the midst of monetary easing as opposed to raising rates when they were heading into 2011. And, most important, the U.S. economy is adding jobs at an apparently sustainable pace, especially in the private sector, while federal, state and local government payrolls have shrunk to help balance budget deficits.
Surprisingly strong corporate profits caught most investors off guard during the first-quarter earnings season after early warning shots in December from some Wall Street darlings. As such, expectations were low coming into the year, and the Santa Claus rally didn’t get into full swing until the first week of January. Since then, professional money has ruled the current rally, while the retail investor, as measured by mutual fund inflows, has remained steadfastly in fixed income.
Capital spending by corporations had been curtailed during 2011, thanks to fears of financial contagion in Europe, the pending year-end deadline for extending the Bush tax cuts and a major stalling-out of the Chinese economy.
Now we’re getting hard evidence to the contrary as each of those fears is allayed in turn:
- Tax cuts were extended through 2012
- Europe’s sovereign woes are currently contained to Greece
- China is forecasting a lower but still-robust rate of GDP growth of 7.5% for this year.
Current surveys show that corporate spending on retooling and technology upgrades in Q1 2012 surely will pad the top and bottom lines of most of the companies in the S&P 500. The upside surprise is the strength of retail spending by consumers — credit has been expanding at a fast pace during the past three months, and most of that spending is going into home repair, personal technology equipment, clothing, recreation and affordable dining out.
Those who have feared that this year’s rally will fizzle out after such a strong start and are sitting out will continue to be frustrated holders of cash and bonds that are earning negative real returns when you include taxes and inflation. Even after the cherry trees lose their blossoms in April, the first-quarter earnings season that begins then is shaping up to be one very ripe bowl of cherries.
