Economy Moving in the Right Direction

Economic & Market Update: June 8, 2009

“Economy Moving in the Right Direction”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Personal Spending:     -0.1% – consumers still not ready to spend  

Construction

Spending:                      0.8% – positive surprise with increase in private construction

Factory Orders:            0.7% – inventories decrease for 8th consecutive month

Nonfarm Payrolls:      -345K – education/hospitality only sectors to add jobs

Unemployment Rate:   9.4% – higher than expected as more people search for jobs

Consumer Credit:       -15.7B – revolving and non-revolving debt rapidly declining

Stocks:                             940 – quick start on Monday established mood for the week

Bonds:                           3.8% – curve is steep – the spread between the 2- and 10-year Treasuries at historic high

Oil:                                   $68 – crude briefly touches 7-month high

Dollar/Euro:                 $1.40 – dollar gains on weak jobs reports

Economics This Week:

Date      Item                                            Est.                     Comment

6/10      Trade Balance:                  -28.7B  Oil prices likely to drive trade

6/11       Retail Sales:                          0.3%  Expectations of slight bounce

6/11       Business Inventories:      -1.0%  Inventory levels still contracting

6/12      Michigan Sentiment:          68.6    Further bounce in sentiment expected

Equity Markets Continue Slow Climb Upwards

The equity markets galloped out of the gates early in the week following stronger than expected construction spending and personal income/spending releases.  Overseas economic reports from Asia and Europe gave additional support to the equity rally.  With the 2.6% gain on Monday, the S&P 500 index closed above its’ 200-day moving average for the first time since December 2007 (more on that momentarily).  Even the historic bankruptcy of General Motors did little to derail the optimistic mood of the markets. 

The rest of the week brought a more tempered tone in the broad indices, with a modest number of catalysts driving the markets.  Friday brought about the release of the closely watched nonfarm payrolls and unemployment rate.  Although nonfarm payrolls proved to be much stronger than consensus, the unemployment rate surged to the highest level since 1983.  The higher unemployment rate was primarily due to more individuals returning to the workforce in search of employment. 

While nonfarm payrolls came in ahead of expectations, it is important to keep these numbers in context.  During the previous recession in 2001, the worst month for employment was a loss of 325k jobs.  Prior to that, in 1990-91, the worst month was 306K.  So while the economy is not in as bad of shape as it was earlier in the year, we are still in the midst of a very serious recession. 

Moving Averages Show Signs of Life

As mentioned above, the S&P 500 index finally closed above its’ 200-day moving average on Monday and was able to hold those levels throughout the week.  This has generally been received as a hopeful sign for the markets that the current rally will extend its lifespan moving forward. 

It is still uncertain whether this is a new bull market or merely a bear market rally, but previous bull markets were characterized by a 200-day average that was upward sloping.  The chart below shows that this is clearly not the case at present.  Whether the market can hold these gains long enough to allow the 200-day average to turn up remains to be seen. 

Source: Bespoke Investment Group

Another trend we like to watch is the comparison between the 50-day and the 200-day simple moving averages of the S&P 500 index.  When the 50-day average trades above the 200-day average that is often an accurate signal that a bull market is beginning.  As seen from the chart above, the 200-day average (the green line) has been above the 50-day average (the red line) since December of 2007 – when the market last peaked. While this is still the case, the two trend lines are approaching convergence – an optimistic sign for a continued rally.

Formerly Resilient Consumer

It is common knowledge that the American consumer is one of, if not the, most resilient life forms in the known universe.  But it appears that a sea change may be underway as consumers continue to choose to save more and spend less.  As a case in point, the personal savings rate rose to 5.7% in April, the highest level in 15 years.

Source: Northern Trust

Baby boomers, whose investment portfolios were left in tatters at the end of 2008, are re-focusing on their retirement needs and realizing that they are overwhelmingly under-prepared for the prospects of a life of leisure.  In addition, younger generations are suffering through one of the worst job markets in half a century, causing them to also opt for a life of increased savings.

This week provides another data point, in the form of retail sales, which offers a glimpse into consumers current mood.  Economists are expecting a 0.3%  month-over-month increase but this will likely be driven by increases in retail gas prices as much as anything. 

In the end, fiscal responsibility is as important for a consumer as it is for the government.  An increased savings rate creates a drag on economic recovery in the near-term but, if we’re being honest with ourselves, the savings rate in America had no where left to go but up.  What will be interesting to see is just how far up it goes this time around. 

Likelihood of Recession in Decline

In what is not necessarily a surprising bit of information, the probability of recession is declining in the US.  Two methods of quantifying the probability of a recession, from the Federal Reserve and Wachovia, were recently released to support this exact hypothesis.   

The Federal Reserve’s model, based on the spread between 3-month and 10-year Treasury rates, projects the likelihood of recession 12-months in advance.  The model currently implies a likelihood of recession for May 2010 at 0.17%, the lowest level since June 2005.  Interestingly, the current slope of the curve is reminiscent of the pattern that developed near the end of the previous recession. 

Source: New York Federal Reserve

Wachovia’s model, constructed using a broader set of economic indicators, is consistent with the Fed model and places the odds of a recession 6 months in the future at 47%.  This is down from tremendously higher levels in 2007 and 2008.  Based on this model, Wachovia anticipates the recession will last through the third quarter before giving way to a recovery in the final quarter of 2009. 

Source: Wachovia

The usual disclaimer applies, as neither model is an exact solution to predicting recessions and recoveries.  However, positive signs can be gleaned from both models and lead us to believe that recovery by the end of the year is likely. 

The Week Ahead

Economic releases will be sporadic throughout the week.  Of interest will be the ‘International Economic Forum of the Americas’, which begins in Montreal on Monday.  An array of speakers, from former Secretary of State Madeleine Albright to General Electric CEO Jeffrey Immelt, will discuss the impact of the global economic crisis on trade, governance and development. 

Elizabeth Warren, chair of the congressional oversight panel for TARP, will appear before Congress to talk about the bank stress tests impact on TARP. 

News from China may have an impact on the markets here at home with PPI, CPI, trade balance and retail sales all scheduled for release in that country.  

About Fortigent:

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include an "open architecture" investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

For more information, please visit our website at http://www.Fortigent.com.

The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.

Not FDIC Insured No Bank Guarantee May Lose Value

© Fortigent, LLC

www.fortigent.com