Stocks dipped in the first part of April and then recovered somewhat, as strong corporate earnings contended with weaker than expected economic growth in the U.S. and the resumption of negative news from Europe. After advancing for six months straight, the Dow Jones Industrial Average eked out a tiny gain for April, although other major averages were down slightly. Repeating its pattern of the last two years, the market has paused after a strong rally (the S&P 500’s 12% gain in the first quarter of 2012 was its best in more than 10 years) as investors await clues as to the strength of the economy and the sustainability of corporate profits.

The major averages varied only slightly from where they finished the first quarter, as shown in the table below.

According to the initial report from the Commerce Department, U.S. gross domestic product grew by 2.2% in the first quarter, less than many economists had expected. However, the advance quarterly reports are revised – sometimes significantly – before the final figure is computed, meaning that no firm conclusions can be drawn as yet as to the economy’s future strength. Consumer spending, which accounts for about 70% of GDP, rose more than anticipated in the first quarter, helped by mild weather and a surge in motor vehicle sales. However, consumer spending has outpaced disposable income by a wide margin over the last few quarters, suggesting the recent pace will be difficult to sustain. In fact, personal spending slowed in March, rising 0.3%, the Commerce Department said, just under the 0.4% growth forecast by economists in a Dow Jones Newswires poll.

Earnings season is in full swing, and so far, the news has been generally good. Of the 300 companies in the S&P 500 that have reported first-quarter earnings, some 70% have beaten analysts’ estimates, according to S&P Capital IQ. Profit margins also seem to be holding up.

Overseas, concerns grew about weakness in Spain’s economy, which contracted for the second consecutive quarter – the technical definition of a recession. The credit ratings of Spanish banks were downgraded Monday, and Standard & Poor’s lowered Spain’s debt rating by two notches last week. Fears that weakness in the Eurozone could spill over to the U.S. helped derail the market’s advance in 2010 and 2011, so investors are watching this area closely.

Going forward, the April jobs report – due out Friday, May 4 – will give some indication as to the direction of employment growth, which is crucial to the continuation of consumer spending. The weeks ahead also will provide a clearer indication as to whether corporate profits, a key driver of stock prices, will remain robust.

After rising roughly 25% since last October, stocks have reached levels well ahead of what many market analysts had predicted. While that alone may not be a reason to make any changes in your portfolio, it’s also a situation that bears watching. If you’d like to discuss that – or have any other questions or concerns – please give us a call.

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