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Market Talking Points

Correction of Sentiment or Something Worse?

The S&P 500 is closing in on its first 10% market correction since turning higher from the bear lows 15 months ago (March 2009). Since 1928, there have been 92 instances of a 10% market correction or an average of 1 every 11 months. Two-thirds of the time, market pullbacks have presented good buying opportunities with market indices, on average, recovering from the decline two months later. With the benefit of hindsight, these corrections are referred to as sentiment-related and ascribed to investor expectations getting too far ahead of improving fundamentals. Bear markets have occurred, on average, every 4 years. Bear markets are declines of 20% or more and are accompanied by deterioration in fundamentals from a slowing, if not contracting, economy. The argument that the current correction is sentiment-related is that the enormous and extended increase in stock prices for the last 15 months without a correction has made them vulnerable to a pull back. In other words, the stock market was due for a correction with instability in Europe acting as the catalyst. Fundamentals, as represented by consensus analyst earnings estimates for the next 12 months, show no sign of deterioration. Forward earnings estimates for the S&P 500 have increased 13.5% since the beginning of the year and 7% in the last 45 days. The recent acceleration is a reflection of first quarter earnings reports that vastly exceeded prior estimates. The current consensus forecast for S&P 500 earnings in the next 12 months is about $88, up from $62 in April 2009, and reflects expectations of an improving economy. Bearish market watchers believe the current circumstances make past comparisons at this stage of recovery less reliable and that todays uncertainties are larger obstacles to normal economic activity. How much of this view comes from anchoring to the experience of 2008, or prescient forecast of the future, is impossible to know. Historically, double dip economic recessions have been rare. What is far more common, however, is for the stock market to experience a 10% correction after an initial recovery. The memory of the 2008 bear market is exacerbating investors anxieties. We view the current market weakness as sentimentrelated, and in the context of the past, an anticipated occurrence. What would change our view is evidence of fundamental deterioration, which has yet to emerge.

Richard E. Cripps, CFA Chief Investment Officer EquityCompass Strategies

Important Disclosures The information contained herein has been prepared from sources believed to be reliable but is not guaranteed and is not a complete summary or statement of all available data nor is it considered an offer to buy or sell any securities referred to herein. EquityCompass Strategies is a research and investment advisory unit of Choice Financial Partners, Inc., a wholly owned subsidiary and affiliated SEC registered investment adviser of Stifel Financial Corp. Portfolios based on EquityCompass Strategies are available exclusively through Stifel, Nicolaus & Company, Incorporated. Affiliates of EquityCompass Strategies may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. The S&P 500 Index is a broad market index that tracks the performance of 500 stocks from major industries of the U.S. economy and is generally considered representative of the U.S. large capitalization market. Indices are unmanaged, and it is not possible to invest directly in an index. Past performance is no guarantee of future results. Additional Information Available Upon Request 2010 EquityCompass Strategies, 501 North Broadway, St. Louis, MO 63102. All rights reserved. April 2010