The opening quarter for the S&P 500 Index was notably buoyant, rising 10.6 percent, thereby taking out the high water mark set in late 2007.  We did trail slightly but we are almost fully invested expecting further gains for stocks based on fair valuation and continuation of Federal Reserve Board policy easement this year and probably 2014.

To sum up our point of view in 25 words or less:  The Fed won’t tighten rates.  Consumer sentiment and spending improve.  Housing’s recovery seems irrepressible and capital goods appropriations finally show some life. (22 words)

Ben Bernanke’s congressional testimony pointed to sticky unemployment indefinitely so there’s no serious tightening of money market rates on the horizon.  The Fed’s bond buying program, some $85 billion monthly, rests in place.  Housing starts and auto sales reflect the ease of financing for individuals at historically low rates of interest.

For corporations, the high yield bond market’s underwriting window stays wide open, even for CCC and single B credit ratings. Although 30-year Treasuries did move above 3 percent, rates on junk bonds haven’t budged. Any corporation with some credentials can borrow 10-year money around 5 percent.  We’re talking $500 million or more.

There could be a surge in deal activity coming.  Little appreciated, is that once deal activity embraces a cross-section of industries it lifts all ships in their respective sectors.  During the eighties, we saw this phenomenon in broadcasting, gaming casinos, natural resources, department stores, banking and finance as well as technology and consumer non-durables. Remember the battles over Reynolds Tobacco and Revlon?

Some 20 percent of the eighties’ bull market, pre-Black Monday, was traceable to deal activity and buybacks.  A current study by Credit Suisse suggests the present market’s deal levitation could amount to 9 percent. 

The S&P 500 Index year to date holds its own against all other financial markets here and abroad, up over 10 percent. The value sector, thanks to banks, handily outperforms growth stocks and NASDAQ.  Emerging markets show negative returns while the world index, (MSCI) trails the S&P 500 by 350 basis points.

High yield bonds, up 2.9 percent, seem on track to at least earn their coupon (6 percent) but little more.  Barring a weakening economy, Treasuries remain problematic.  LIBOR is next to nothing and facilitates deal financing and home mortgages are tied to LIBOR.

When we look at the top 100 stocks by market capitalization, implementation, or stock picking, it’s still not a lay-up.  Stocks within their respective sectors show extreme variance, in technology, energy and consumer cyclicals, for example.

It’s not surprising how buoyant biotechnology paper trades.  The market remains starved for growth stories.  Some positions are helping performance along with the relatively good action in ethical drug houses, largely financial engineering plays with ample dividend coverage.

Technology is all over the place, with some disappointments because information technology spending lays dormant.  There are few big cap performers.

Our top positions show overweighting in financials and overall light in technology. Biotechnology is a serious overweight. We see the market posting a double digit rate of return again this year.  The right number looks like 1600 to 1650 on the S&P 500 Index.  Then, corporate earnings momentum must carry the ball.

What could upset our cockeyed optimism?  Plenty to worry about:  China’s export momentum slows thereby reducing their raw materials imports.  Materials stocks continue to sputter.  Sickies like Italy and Spain, could lose refinancing capacity and float out into the Mediterranean Sea.  Iran, North Korea, Syria and Cyprus remain festering issues.

It ain’t easy to stay optimistic 365 days out of the year.  As a frame of reference, since the Internet bubble in 2000 the market has compounded at a skimpy 2.4 percent.  Not exactly roses and daffodils.  But, it’s catch-up time for equities.  We expect corporate profit margins to hold firm, buoyed by low labor costs, minimal interest expense and some firming of capacity utilization.