The Outlook, thus far;
A key aspect of the process of moving from recession to recovery is the continued development of an improving trend in the Conference Board’s Leading Economic Index (LEI). This index has an excellent history of forecasting economic recoveries; as such the index has risen for three consecutive months for the very first time in five (5) years. In my view the index is signaling the beginning of an economic turnaround. Comprised of ten indicators, the LEI had seven of the ten increase for the second consecutive month.
I still expect unemployment (a lagging indicator) to continue to provide headwinds for this recovery. In addition GDP growth for the 2009 year will be anemic at or below 1% with a target range between 1-2% annually. The forecast for GDP in 2010 remains questionable as we are not expecting the consumer nor unemployment to lend a very helpful hand, thus estimates are at 2% at best.
Industrial production in June declined .4% which improved from a negative 1.2% in May, it is anticipated to slightly improve for July. Meanwhile the bright spot of the economy has been Productivity; the US service based economy has remained positive despite this deep recession, as such the outlook for both the unit labor cost containment and price stability are favorable.
Inflation concerns, right now, continue to be premature; the US remains in a negative output gap and the capacity utilization rate is at 68% versus the long term average of 81%. Bottom line, currently the level of factory utilization is so low that inflation is not a current issue.
John Maynard Keynes wrote about “the paradox of thrift” and this is now being practiced by the US consumer for the first time in decades.
The paradox observes that consumers increase their savings rate- spending less in tough economic times, and the increase in savings while good for the individual is not helpful to the society at large; as increased personal thrift translates to reduced demand for consumer goods and services, which also spells less job opportunity.
Evidence of this paradox is readily available as the American consumer has saved from a rate of near zero in 2007-2008 to as much as 7% recently. So the only offset to the paradox is fiscal stimulus to replace the lack of consumer demand. The government has provided a 787 billion dollar stimulus package, yet less than a quarter of this stimulus has been used as of the end of July! Meanwhile other very evident signs of the paradox are observed through the stats, for example, household and non-financial company debt in the first quarter of 2009 declined by 0.7% the first such decline in 57 years!
Inflation summary, with less demand seen for all of 2009 and many years to come, well below tread line, we do not anticipate inflation problems for any time soon.
Housing is finally showing slow signs of stabilizing as well, the June inventory numbers of unsold homes declined to a 9.4 month supply, down from 9.8 in May. Single family homes and condominiums sales increased 3.6% in June, the best monthly figure since October. Home re-sales have increased three consecutive months, and new home sales rose 11% in June, the third increase in a row.
The Strategy so far;
I continue to recommend a fully invested position in a diversified risk adjusted portfolio. I have moved the target on the S&P 500 from 1050/1100 to 1150/1200. This target will not be achieved without a fair amount of volatility – so as I have said repeatedly, volatility is going to remain a constant.
Market Commentary - Stock Market Update - September 2009
September 9th, 2009August turned out to be a very good month for equity owners, and the reason behind the positive stock market flows is fairly obvious.
First we continue to receive steady improvement in the leading indicators; note they are not turning positive in most cases, but they are less than worst. Secondly, there is a tremendous amount of sideline capital; one theory is that on these pullbacks/corrections, typically 7% to 10%, we are only seeing 2% - 5%, as capital is flowing in on pullbacks.
Asia; we did hear a lot of talk from the media that Chinese stocks were going to tumble and drop significantly in August, however, as always the media was wrong. The chart below shows that while Chinese stocks did give up gains, the volume of buying did not relent.
The month of August included earning season, and while earnings for many companies exceeded analyst expectations it was still a sobering period. The chart below depicts the continued pressure that US companies are going through during this recession.
Nevertheless the fact that almost fifty percent did beat revenue estimates accounted for a nice August run. With the void of such information in September and early October, investors should brace themselves for a pull back or very choppy market trading. Furthermore, the monthly survey of manufacturers in New York State improved, finally.
On yet another front, housing and even employment data seemed to be better than expected. Particularly impressive have been the signs that perhaps nationally we are starting to see the housing market bottom. While the chart shows a “bullish” pop we do not feel that either area is out of the woods yet. We are impressed with housing, but as I have warned before, unemployment will continue to increase; best guess estimates call for a zenith by 2010.
The latest numbers are still showing that corporations are in layoff mode, even though they are increasing inventories and productivity. So while better, the unemployment scenario is still very weak.
While we are remaining bullish in an S&P target of 1100 to 1200 by the end of the first quarter of 2010, I continue to warn that this is no more than a cyclical bull rally in a larger secular bear market (refer to website and past articles for additional comments on same), and that investors should not become over aggressive or complacent either.
We all should begin planning for “what’s next” and the scenario is more than likely pointing to stagflation. While I do not see this scenario panning out until 2011 it is possible it could wait until 2012. Historically inflation remains benign when demand is non existent, I do not see demand picking up until late 2010 and therefore inflation should remain tame. This coupled with the fact that the FED has historically always waited until twelve months after the peak of unemployment to raise rates probably puts into second half or late 2011.
Keep in mind these are not usual times, so while historically is a beta it is not gospel. Therefore, I maintain that tactical asset allocation and bear market strategies must be deployed. For more information on these strategies and/or how to implement call Glenn and set up a phone review or meeting with me.
Keep your powder dry and your eye on the S&P 500.
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