The Never-Mind Market…Just a few short weeks ago, the market was selling off because of rising oil prices (Libyan revolt) and Japan’s devastating earthquake. Here we are today with the market at yearly highs, having recovered in a steady march from the mid-March lows. (The Nasdaq has not fully recovered.) All this, even though the Libyan upheaval is far from resolved and Japan’s woes run on.

Do we have a case here of a market with attention deficit disorder? There is a little bit of that, but more importantly the market appears to have taken the measure of both crises and decided that neither poses a major threat to the global economic recovery. The decision is subject to change at any notice.

A potential threat does come from oil, and the possible spread of the Arab awakening to Saudi Arabia, with unknown consequences. That was the concern behind the market slide. For the moment, the sense of a spreading wildfire has died down. With that, the American market has turned its attention back home to the economy and market fundamentals.

What the doctor ordered…In general, the U.S. economy has been performing well over the past nine months with some sputter last quarter (weather, oil prices). While performing well, one crucial part of the economy has continued to disappoint: the job creation part. But finally, as detailed in last month’s employment report, the job creation machine has kicked in. Aside from the absolute number of new jobs reported (216,000), the report was noteworthy for the breadth of the gains, particularly throughout the service sector. The service sector (retail trade, business services, education/health) is where the jobs are.

For the market, the employment report certified the market’s recovery. The market’s bullishness was premised on the view that the economic recovery had staying power and would develop momentum of its own. The March job numbers provided strong evidence that the view is correct.

The market has already gained more than one-third of the gain we had projected for the year (15%) in our year-end outlook. We do not intend our outlook numbers to be taken too literally, rather more as ball-park numbers, indications of how strong or weak we expect the market to be over the coming twelve months. In that vein we see the domestic market as remaining well-valued with good opportunities for further gains. Putting a number on it, we see another 10%-15% ahead before we would become concerned about valuations.

At the same time we have to recognize that the market has had much going for it as Washington worked overtime to pull the economy out of its deep hole. The economy is going to lose some of that stimulus this year. The Fed will most probably be ending its stimulus bond-buying program in a relatively few short months. We do not anticipate any important rise in interest rates as a result, but the move is not market positive.

Also the economy is going to lose some fiscal stimulus as the Federal budget is trimmed. How much of an effect we are dealing with is unknown, but activity should be affected at least initially. Our point is that expectations for this year, while justifiably positive, need to be kept moderate.

Reviving emerging markets?…While the U.S. market has been in full recovery mode, other markets have been recovering as well. A quick glance at our international fund list shows that Eastern European funds are well represented at the top of our list. That certainly was not the case at year-end. And other emerging markets have been doing well of late, though not all. The Hong Kong market is up almost 5.0% for the year so far, and the Indian market, though down for the year, has also been recovering.

A general explanation for the turn in the emerging markets is the improved outlook for the U.S. economy. As we saw during the onset of the recession, foreign markets, particularly Asian, are extremely sensitive to our economic outlook. Probably this is the result of the importance of the American export market to many emerging market economies.

In the case of the Eastern European funds something else is at work as well – oil and commodities. The Eastern European fund portfolios are heavily weighted toward Russia and as oil goes, so goes the Russian market. Yes, we are exaggerating, but you get the picture. Russia is a major energy producer and exporter. The rise in oil prices has lifted the Russian market as well.