The stock market rally is quite extended. Will the reversal be shallow or protracted? There seems to be a lot of disagreement over this point, and more generally, whether this is a bear-market rally or the start of a new bull market.
What will ultimately decide the market’s fate, I believe, is the flow of economic reports over coming weeks. It was early glimmerings of a recovery in the U.S. economy that ignited and fueled the rally; the tone of economic data over the next few months should be what keeps it going or not.
Let’s do a mash-up of some highlights from the stream of data received to date and see if that gives any suggestions of future developments. Commentary on the data is worth highlighting too. What’s interesting about the latter is the generally skeptical tone (with some exceptions). Is the market climbing the proverbial wall of worry or will it again fail to make the leap?
One the more important economic signals that got the party going came from the ISM manufacturing survey in March. It showed the US economy was contracting at a less rapid pace by edging up to 36.3 from 35.8 in February. Particularly of note, the New Orders Index of the ISM manufacturing survey rose over three straight months, from 23 in December to 41 in March. Inventory rebuilding was cited as the cause.
Norbert Ore, chair of the ISM manufacturing survey committee, cautions: “There is a tremendous purging of inventories taking place and I think there’s still more that needs to be worked through because demand just isn’t absorbing it fast enough.” Another key leading index in the ISM manufacturing survey, the Vendor Deliveries Index, was down 46.7 to 43.6 over the last three months.
There has been some green shoots sighted in the U.S. housing sector. The February Pending Home Sales Index, which foreshadows house sales by 1 to 2 months, increased to 82.1 from 80.4 in the prior month. The Mortgage Bankers Association’s Refinance Index has climbed from the 2000 level in late 2008 to the 6000 level recently.
Yet inventories of house for sale remain high and house prices continue to tumble. The Case-Shiller Home Price Index dropped in January by 19% from a year ago, following an 18.6% year-to-year decline in December.
There isn’t much confirmation from the bond market. according to some observers. The spread between Moody’s Baa bonds and 10-year Treasury Note is over 500 basis points compared to 300 basis points a year ago; spread between ML Junk Bond and 10-year Treasury Note is close to 1600 basis points versus 800 basis points a year ago.
But a leading forecasting firm is bullish. “With [our Weekly Leading Indicator] rising to a 23-week high, an upturn in the U.S. growth rate cycle is now in clear sight,” said Lakshman Achuthan, managing director at ECRI
John Ryding, chief economist of RDQ Economics, on the Obama stimulus package: “… a lot of the so-called stimulus package doesn’t occur until beyond 2010.”
While unemployment trends are considered lagging indicators, parts of the employment data are leading indicators. Of note in the last report, temporary help lost 72,000 workers and total hours worked fell by 1%. The average work week was 33.2 hours, the lowest since records began in 1964.
‘The Economy Is Contracting A Lot More Rapidly than the Government Is Reporting,’ says the headline to a TrimTabs press release. “Job losses have been accelerating in recent months,” said Charles Biderman, CEO of TrimTabs. “Investors who think the economy is bottoming out are going to get quite a shock this spring.”
Billionaire speculator George Soros says in an interview that the market rally is unsustainable. He believes policymakers “did not succeed in recapitalizing the banks to the point where they can lend freely.”
Standard & Poor’s reports there was a record high in the first quarter for the number of companies cutting dividends (367) and a record low for the number raising them (83). “On current estimates, S&P 500 dividends will fall 22.6 per cent this year – the worst year since 1938,” writes John Authers of the Financial Times. He adds: “According to Moody’s, March saw the most global speculative-grade defaults in any month since the Great Depression.”
“There has been a lot of speculation about which corner of the economy is likely to implode next and start to write the next chapter in the current financial crisis. Credit card debt and commercial real estate are two of the most frequently cited potential culprits, but lately Eastern European banks have been under great stress …” comments a chat-room visitor.
“Baltic Index is falling again,” notes another chat-room commentator.
The Treasury is delaying its report on the stress tests of the top financial institutions. Likely means bad news, speculates Mike Shedlock of the Global Economic Analysis blog.
Pimco’s co-CEO Mohammed El-Erian has cut his exposure to stocks to 30% (versus 60% normally). He told CNBC that two out of four conditions need to be met for an economic recovery to begin: house prices need to stabilize, banks must start lending again, the consumer must start spending again and the rest of the world must pick up. “For the moment, only the fourth condition is partly fulfilled, with timid signs of recovery in China emerging,” he said.