The state of the market rally

Author: Gregg Giboney, CFA, Timberline Investment Management

Covestor model: Dividend and Growth

Here is what I believe has led to significant market moves to the upside in recent days:

• Last week's employment numbers slightly exceeded expectations. They continued to support the trend of modestly improving labor conditions.
• Greece negotiated a debt swap with private creditors to forgive a great deal of their sovereign debt. It was deemed to be a default, but the end result was relatively orderly. It may have established a negotiating framework for other indebted European countries. This does not end the debt saga, but it was nice to see a bit of reality in the resolution process.
• The European Central Bank appears to have taken a lesson from our Federal Reserve with its liquidity injections.
• Housing appears to be gradually improving.
• The Fed announcement included the opinion that the U.S. economy and job conditions are improving moderately, even though we still face significant risks with the high level of unemployment. The Fed feels the recent uptick in energy prices will lead to higher inflation, although this is expected to be a short-term situation. Most Fed board members voted to maintain low rates through 2014. There was one dissenting vote by a member who felt that low rates will not be needed for very long, as the economy is improving.
• It was announced today that most major banks passed their annual and rigorous stress tests. With that, several banks announced significant buyback authorizations and dividend increases. Bank equity prices were up nicely today. It looks like the banking crisis in large banks is mostly behind us. The FDIC, however, continues to work on a heavy load of trouble among smaller banks.

As nice and as encouraging as this all is, there are still worries about Iran and energy prices. It is also interesting to note the very low level of recent market volatility. Low volatility can be an indicator of some investor complacency.

The bottom line: I think the fundamental outlook for earnings and the valuation of the equity markets continue to provide good potential for long-term investors, even though I am not so sure that the very sanguine levels of market volatility can be sustained for long.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.