The key points are below:

– In many ways, financial markets have been following the typical pattern associated with economic recoveries. The stock market has been rising, with those sectors that underperformed the most during the downturn now leading the pack. Credit spreads have been tightening, government bond yields have been rising and commodity prices have advanced.

– One unusual aspect of the current advance in equity prices, however, is that the rally has been remarkably smooth and fast. As a result, we would argue that there is a high likelihood of some profit-taking and some sort of near-term correction that would allow the market to catch its breath before moving noticeably higher.

– In addition to the belief that we may be overdue for a pullback, there are some other risks that we think are worth mentioning. High deficit levels are a concern and we expect that higher tax levels are almost certainly forthcoming. The rise in oil prices and the weakness of the dollar also bear watching. From a technical perspective, we would also point out that the pace of increase has slowed in recent weeks and that volume has diminished, which suggests that momentum is waning.

– On balance, we expect that stocks will continue to grind higher over the course of 2009, but not without some fits and starts along the way. At the beginning of the year, one of our predictions was that stocks would experience double-digit gains in 2009. From this vantage point, we continue to believe that this prediction will come true for the S&P 500 and for most other equity markets around the world.


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