The following is reprinted with permission from the April 2012 issue of the award-winning Investor Advisory Service, published on March 23, 2012. StockCentral subscribers can save 50% on a subscription -- see the StockCentral Discounts page for details. The issue also includes three new buy recommendations and no sells. 

Investment Comments

Sluggish U.S. employment growth and deep economic problems in Europe held back U.S. stock prices in 2011. Earnings for the companies making up the S&P 500 grew about 10% last year, but the index level was flat excluding dividends.

Last year started out fairly strong, like this year has, then turned down. However, it feels different this time. This recent market rally comes as the U.S. economy shows signs of strengthening and the worst potential outcomes in Europe no longer seem likely, while Federal Reserve actions render safe investments unprofitable for investors.

The Standard & Poor’s 500 gained 8.6% in the first two months of 2012. This represents the best start to a new year in 25 years. The Dow returned to the 13,000 level for the first time since 2008, while the NASDAQ reached the 3,000 level that it last visited in 2000.

The economy logged its third straight month of job gains above the 200,000 level. Job gains have been broad-based, another positive sign. While we are glad to see a return to steady employment growth, it will take a few more months of gains to lead us to conclude that we’ve turned the corner. It remains to be seen how much of the growth is due to abnormally warm winter weather across much of the country. We also don’t see the rising wages that typically indicate a tightening of the job market.

There are some statistical anomalies that need to work themselves out. The number of working age Americans grew 3.6 million over the past twelve months. However, the ranks of the employed increased only 2.5 million. This means that 1.1 million people left the workforce net of those entering the workforce, perhaps not by choice but by lack of good job prospects. In a healthy job climate, people look to enter the workforce rather than leave it.

Personal income continues to grow steadily, but moderately. Consumer spending and retailer reports appear solid.

The factory sector seems to be healthy. Manufacturing output has grown in five of the past six months. The Purchasing Managers Index from the Institute for Supply Management registered its 33rd consecutive month of growth in February. Some sub-components are slowing a bit, but still registering growth. U.S. auto sales continue to strengthen, reaching an annual rate of 15.1 million units in February.

Internationally, the Greek bailout appears to be largely completed, but was even more costly than expected, setting a dangerous precedent. The European Central Bank handed out another round of low-interest loans to European banks, similar to the U.S. TARP from 2008. These moves seem to be working, as sky-high interest rates on debt of troubled countries like Italy and Spain continue to descend. The most troubled economies in Europe are still contracting, but there are some signs of stability among the healthier economies such as France and Germany.

Interest rates on Treasury bonds have been low for quite some time. The Federal Reserve Board designed it this way by openly purchasing Treasuries. This is part of its “quantitative easing” program, enhanced by another move last year dubbed “Operation Twist.” The goal was to push people farther out on the risk spectrum. This appears to have worked. Initially, it had more impact on municipal and corporate bonds. As those yields declined to very low levels, stocks seem to have been impacted as the next logical choice on the risk spectrum.

As unusually warm winter weather in the northern climates gives way to seasonally warmer spring and summer weather, we will be able to see the degree to which the economy has been temporarily helped by weather. We still see considerable signs of hesitation both at the consumer and corporate level that warrant some degree of caution before we break out the champagne. The combination of higher stock prices and modest economic growth makes it even more important to choose investments carefully.