March 15, 2010A very quiet and slow week of trading produced yet another advance in the stock market. Concerns over Greece and other sovereign debt issues receded while evidence on the global economy was mixed.
As the charts above illustrate, the Dow Jones Industrial Average gained about one half of a percent while the NASDAQ Composite moved higher by 1.8% over the excitement generated by the new product line from Apple. The Markets & Economy We thought last Monday that the week would be light on news and action and it turned out to be correct. Volume has become noticeably and consistently light in recent weeks and volatility has similarly decreased. The economic news continues to dominate the perception of stock market traders. The conventional wisdom seems to feel that not only is the worst over but also that a self-sustaining, albeit slow recovery is taking place. There is much to support such a notion. Retail sales and earnings are coming in much better than expected and the financial system seems to have found firmer footing despite lower loan demand from the still falling corporate and consumer sector. As far as the government sector is concerned, it has never suffered a recession. The government sector, unfortunately, is making up a larger and larger portion of the economy while government workers’ earnings have risen to exceed those in the private sectors. Of course, state and local governments are hurting since they are in many cases broke, so even this sector is a mixed bag. Clearly, the current debate does center on whether or not the stabilization in the data reflects an inventory restocking or whether final demand is rising. Here the evidence is mixed. Certain sectors seem to be doing better such as autos etc… but many others are not talking about a resurgence of any kind. The unemployment rate itself still hovers around 10% and many pundits are now trying to convince Americans that this higher rate is the “new normal”. This is a losing argument since the level of unemployment benefits for this number of unemployed cannot be expected to go on forever. Currently, the unemployment insurance can go on for nearly two years. Thus many millions of people may be less incentivized to find work. The elephant in the room is whether or not the President’s renewed push to pass healthcare reform will pass. The combination of regulation, tax hikes and anger just might not be what the economy needs right now. Consequently, this week’s trading will be looking forward to a resolution of this issue by the end of the week or over the weekend. What to Expect This Week Corporate news will be minimal. The Federal Reserve Board meets for a one-day meeting on Tuesday, but they have a very clear interest in not saying anything that would upset investor psychology. While you will hear much about so-called exit strategies, the reality is this: The economy is likely to already have experienced its best quarterly growth rate last year in Q4. Early indications for this year imply the best growth is being experienced right now and will peter out over the summer (and that is before Obamacare is inflicted on the nation, if that occurs). The Economic Cycle Research Institute’s reading of their leading economic indicators continues to show this (see graph next page). Their own interpretation of this is for no double dip recession, but for the rebound to simmer down. This cannot be good for anyone looking to see the unemployment rate fall in any meaningful way in 2010.
The impact on the stock market will be mixed. This outlook will call for lower interest rates than people currently expect and perhaps lower inflation. On the other hand, lower growth will exacerbate the problems of government deficits with its attending implications for sovereign debt globally. Hence for now, smooth sailing, but we must remain on the lookout for any change in trend in underlying corporate earnings.
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