Use periods of market weakness to upgrade portfolios

U.S. equity markets started the month on a strong note on Thursday, May 1, 2008, driven primarily by some better-than-expected economic data and falling oil and commodities prices, in my view.

Bargain hunting and short covering by investors in sectors that have recently underperformed the market also helped drive today's rally, in my opinion. For the day, the blue-chip Dow Jones Industrial Average rose 189.87 points, or 1.48 percent, to 13,010.0.

The S&P 500 increased 23.75 points, or 1.71 percent, closing at 1,409.34. The technology-laden Nasdaq Composite posted an even stronger performance, gaining 67.91 points, or 2.81 percent, to 2,480.71. Today's strength was relatively broad-based, as eight out of 10 S&P 500 sectors ended the session in positive territory. Financial and Consumer Discretionary stocks posted the largest gains, while Energy and Materials shares posted losses for the day.

Data released from the Commerce Department showed that U.S. personal spending rose 0.4 percent in March, exceeding consensus expectations of a 0.2 percent increase. Personal income for the month was up 0.3 percent, slightly less than the forecasted gain of 0.4 percent and down from a 0.5 percent rise in February. The core personal consumer expenditures (PCE) Index, a key measure of inflation that excludes food and energy prices, rose by 0.2 percent in March, slightly above the Street estimate of 0.1 percent.

A report on weekly jobless claims stated that the number of U.S. workers filing initial claims for unemployment benefits rose by 35,000 last week to 380,000, which compared unfavorably to the consensus forecast of 365,000. However, a report released by the Institute for Supply Management (ISM) exceeded expectations, showing that manufacturing activity held steady at 48.6 in April, representing a flat reading versus March but slightly better than the consensus forecast of 48.0.

I believe the increase in personal spending, coupled with the manufacturing data, helped assuage investors' concerns about the state of the economy and a large slowdown in consumer spending.

We believe persistent problems in the housing and credit markets and their potential impact on U.S. economic growth will continue to cause volatility in the equity markets over the near term. We note that many of the issues plaguing risky assets at present may take some time to work their way through the system. Longer term, however, we believe the equity market is reasonably well positioned to contend with these concerns; we point to attractive valuations, solid corporate balance sheets (excluding financials), and strong free cash flow generation as drivers for equities going forward. Indeed, a number of the Firm's proprietary valuation and sentiment indicators point to higher equity markets by the end of 2008, although our generally positive outlook is predicated upon successful policy implementation by the Federal Reserve and others. Risks to a sustained market rally include a continued deterioration in credit markets, persistently high oil prices, and meaningfully slower global economic growth. Given our longer-term positive view, we would use periods of market weakness to upgrade portfolios and build positions in high-quality companies that generate strong free cash flow and possess above-average prospects for growth.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of SmithBarney, a financial services firm serving Northern Nevada at 6005 Plumas Street, Ste. 200 Reno, NV 89509.