Is the Market at a Turning Point?

On March 9th many investors were glad to be holding sizable cash balances in their investment portfolio when the S&P 500 Index hit an intra day low of 676. Since that time the S&P has moved higher by nearly 36%. Now investors are lamenting the fact they are holding cash that is earning very little interest. Keep in mind, the Fed's goal is to get investors to move out of cash into more risky investments.

We are at the point where the "less bad" news is viewed as good by the market. Appropriately, economic data that is getting less worse is a positive, but data, like unemployment, needs to turn into employment growth. Losing 500,000 jobs is still bad although it isn't as bad as losing 600,000 job like we have seen recently.

Several discouraging pieces of data in the short term are related to consumers. Consumer revolving credit continues to decline. Record job losses are contributing to the credit decline.

Source: Federal Reserve Bank & Argus Research

In the long run, reducing consumer debt is a positive as the consumer is too leveraged at the moment. However, short term, reduced consumer spending is a drag on GDP growth since consumer spending has accounted for 70% of GDP growth. So where does economic growth come from?

The level of inventory remains bleak, but additional data will be released on Wednesday regarding inventory levels.

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Source: Federal Reserve Bank St. Louis

As I have noted in earlier post, once inventory gets down to a low enough level relative to sales, companies will need to produce additional goods. This will stimulate some economic growth.

Lastly, the bull market run has seen a majority of stock prices move higher. The percentage of NYSE stocks that are trading above their 50 day moving average is over 90%.

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Yesterday's market action saw a rotation into some of the defensive sectors in the S&P 500 Index. The health care sector was up 4.08% and the staples sector increased 3.08%. The economically sensitive sectors saw declines: industrials down 2.46% and technology down 1.64%.

A market correction at this point that consolidates recent gains would certainly be healthy.

Comments

[enigmaman:]

To believe the consumer will resume their old spending habits is ridiculous, they were burned in the 2000 bubble, sort financial refuge in the housing market, with its collapse consumers are underwater in mortgage vs home value, then the collapse of the stock market, consumers and investors are understandibly gun shy and will only resume some sort of consiatent discretionary spending after they are complety sure they are out of harms way, it will be many years before they forget the pain this last decade has caused them. Mark Twain once said " If a cat sits on a hot stove it will not sit on a hot stove again, but it will also not sit on a cold stove either, because it has over learned from its experience" for anyone to really believe consumers will once again line up to put themselves in harms way again is at best wishful thinkning.

May 13 09:33 AM