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Weekly Financial Review

There are plenty of reasons why the stock market could be selling off headed into the last half of the month. There's the seasonal adage, "sell in May and go away," for one, especially since many short-term price targets for stocks were met by the move to all-time records last week.

The rising dollar and higher interest rates also were cautions once upon a time, not to mention gridlock in Washington, deficits, government regulation, etc.

Nonetheless, the Dow and the S&P thumbed their noses at the naysayers again on Tuesday, moving to new record highs.

For now, at least, stocks are the only game in town. Even cashing out in May means losing money while you're away, with no real returns to safe havens like T-bills or money markets.

Investors can thank corporate America for their accruing capital gains. U.S. companies continue to make money. While earnings forecasts are easing, they're still forecast higher into the end of the year. First quarter earnings season is winding down. Some two-thirds of the S&P 500 beat their estimates, while only a quarter missed, putting plenty of cash on corporate balance sheets.

Rather than expand through capital investment, firms are returning that cash to shareholders in the form of dividends or stock buy-backs that make the stock more attractive. And companies that are still private are going public, generating more buzz for the market.

Investors used to flock to the dollar as a safe haven. Now the greenback is appreciating on its own against most other currencies. Some of the other currencies are weakening due to their own problems, like the Yen and euro. But even once high fliers, like the ruble and Brazilian real are losing ground to the dollar.

U.S. GDP is growing, albeit at a slow rate than everyone would like. And, while U.S. interest rates remain at historic lows, they've started to edge higher. The yield on the 10-year Treasury, for example, is still below 2%, but is 25 basis points higher since the start of the month. That's taken the interest rate on a typical fixed farmland loan back up to almost 5%.

Doom and gloom warnings are rising with the season, and in the prospect for bond prices to crumble, increasing rates, once the Federal Reserve begins to wind down its debt buying program of easing. As rates go up, the dollar should strengthen even more if it gains a comparative yield advantage against other currencies. But that purchasing power could be another factor keeping the cost of imports low, restraining inflation and giving the Fed more room to keep the money supply flush until employment picks up.

In the short term, bad news from someplace could cause the seasonal pullback to come back into play. But the S&P is looking like it wants to rally after that, with the forecast high for the year pointing to a move above 1,700 if current fundamentals hold.

The loser could be gold, and by extension other commodities. With inflation subdued and the dollar strong, investors have less reason to buy gold, either as a safe haven or a hedge against a weak greenback. That's keeping gold below $1,500, unable to break through chart resistance.

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Senior Editor Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and farm management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key farm crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.