Wishful thinking continues to set the tone in the stock market. The latest questionable data point seized upon by the bulls to justify driving prices higher was a consumer sentiment survey Tuesday that revealed people believe conditions will be better in November than they are now. These surveyed people don’t see current conditions improving in any meaningful way, but perhaps because the recession has dragged on for so long they think things can only get better six months from now.
That, indeed, may prove to be the case. And we hope it is. But investors are ignoring other data of equal merit that tell a decidedly different story. Also out Tuesday was the latest print on the Case-Shiller Home Price Index which showed a record year-over-year drop in housing prices. Today, the Mortgage Bankers Association said that mortgage applications (for both new loans and refinances) continued to decline in the latest week. So the housing market remains in shambles.
Hopes for the recovery are largely pinned on the consumer. But the housing sector isn’t the only place consumers are steering clear of. The retail sector isn’t looking too good either. Companies in the group have been beating lowered expectations for first-quarter earnings (mostly on inventory reductions and cost controls), but on balance they’re offering gloomy assessments for the months ahead.
The “things will get better” camp isn’t limited to just consumers, professionals are also in on the act. Consider the latest forecast from the National Association for Business Economics, which calls for a “moderate” recovery in the second half of this year, even as they continue to lower their forecasts for not only the second quarter, but for the subsequent six quarters as well.
The banking sector isn’t going to collapse, but it’s still in no great shape. FDIC Chairman Shelia Blair was trumpeting the improvement in bank earnings this morning which, if you exclude the assets being guaranteed by the government and with the help of questionable accounting moves, the industry earned $7.6 billion in the quarter, compared to a loss of $36.9 billion in the fourth quarter.
Despite the supposed improvement in bank profits, problem bank assets rose to $220 billion, up from $159.4 billion in the prior quarter. And the number of banks on the FDIC’s problem list rose to 305 from 252 in the fourth quarter. That list is only set to grow.
Our overall market assessment hasn’t changed this week: Sometime in the near future stocks will undergo a sizeable correction, possibly retesting the March lows in the process. Until that correction is out of the way, the market’s upside potential is likely rather limited.
