Nasdaq caught up with other indices

Retail stocks, which have led the markets since September 11, have underperformed in the latest rally. There are few signs that could further extend that relative under-performance. Firstly, valuations are no longer cheap. Some big cap retail stocks appear modestly overvalued (with P/E at 40% premium to S&P 500). Secondly, although the robust housing market has been a major boost to consumer confidence, new home sales unexpectedly fell 14.8% in February.

Thirdly, since the economic slowdown in 2000, industrial production growth has decreased at a rate much faster than personal expenditure growth. Retail stocks' relative performance typically was at their best when the gap between consumption growth and production growth is widening. However, after the gap widened to the biggest level (11%) in 19 years, it has started to narrow, as personal consumption growth stabilizes while industrial production growth improves.

Airline stocks, which have had strong performance since September 11, appear trading well ahead of fundamentals. Most airlines are not expected to post profit until the end of 2003. Share price of some airlines appeared even discounting 2004 earnings.

European markets have posted the second consecutive weekly gain as U.S. economic figures point to a positive economic outlook. U.K. FTSE index underperformed relative to major global equity markets due to its overweight exposure in defensive equities.

In the coming week, focus would likely be on statements from Nokia and BASF. Nokia is expected to release a trading statement on Tuesday while BASF is expected to post results on Thursday.

In Japan, despite disappointment toward government's policies against deflation and a low approval rating to Koizumi cabinet (44% polled by Ashahi Shimbun on March 1-2), cross-shareholdings unwinding spark a strong rally in the stock market..

Looking ahead, investors' focus will switch to LDP's decision for FY3/03 budget bill. Speculation of another supplementary budget and tax reforms could help support the stock market in the near term.