U.S. Stock Market: 3 Key Issues to Watch

As we head into the fall and we look forward toward next year, it is important to take a look at the general econimc landscape, assess the data that we have access to, and develop our views on the performance of our investments going forward.

The following are three high-level economic data points that we can use, along with our other tools, to further assist us determining our views on equity market investments.

1.) U.S. Housing

As the root of the credit crisis, healing in the U.S. housing market is a precondition for sustainable recovery. Recent data has confirmed that the worst is behind us and the residential real estate market is stabilizing.

The inventory of unsold houses while still high is heading in the right direction towards clearing and sales of existing homes have recently turned positive on a year-over-year basis. And an index which measures year-over-year price changes of houses in 20 major U.S. cities (the S&P/Case-Shiller Home Price Index) plunged 33.6% from its June 2006 peak to the April 2009 trough, but has now climbed 1.9% over the past two months.

2.) The U.S. Consumer

The resurgence of the U.S. consumer will be key to watch as recovery unfolds since consumption is 70% of the American economy. Despite the ‘hit’ that the housing crisis has exacted on their net worth, American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade.

However, the process of deleveraging (winding down debt) has begun and this will impact spending patterns in the near-term.

3.) The U.S. Manufacturing

The level of manufacturing has historically followed an inverse path to the Fed funds rate but on a 6-month lagged basis – as the fed funds rate drops, six months later, manufacturing activity picks up.

However, in fall 2008, although rates declined to historically low rates, the credit crunch intensified and that typical relationship between low interest rates and increased manufacturing activity did not materialize. More recently, credit channels have opened up and the ISM (gauge of manufacturing activity) has improved, indicating the economy is finally responding to massive stimulus after a long lag.

And further improvement just Wednesday with the latest ISM level better than expected at 52.9 – the first reading above 50 since January 2008 and hit the highest level since June 2007. This is further indication that while not yet normal, the economic environment is normalizing.

These are three key areas of the market to watch when assessing the high-level economic situation and it’s relationship to the stock market trends and valuations.

Of course this isn’t the be all and end all of data you should include in your due diligence, but it certainly plays a role as you calculate your risk tolerance moving forward.

Comments

[Dave Wrixon:]

OK, do we have listened to the patter. What are you selling?

Sep 03 08:07 AM

[jeremiah74:]

"American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade."
stocks, adjusted for inflation or for the $'s purchasing power are not showing tremendous growth. housing still higher than 10years ago. private debt is a lot higher though.
so overall household balance sheets are in NO WAY in better shape than in the past.

"More recently, credit channels have opened up and the ISM (gauge of manufacturing activity) has improved, indicating the economy is finally responding to massive stimulus after a long lag.:
the economy is responding all right to something. but the question is whether this will be sustainable and whether it can withstand the rmoval of the stimulus, OR is able to produce enough growth to wrok off the increased public sector debt.
moreover a few months of better THAN EXPECTEd data means nothing. a.again its not sure, its sustainable. b. the data isnt good per se, just marginally better than the consensus of economists' estimate. it just means that economists were too pessimistic a few months ago when they made their forecasts. in all likelyhood they will get too optimistic and revise their forecasts higher for growth, and then the data will come in worse.. but thats starting in September. so far we are enjoying the better data of Jul-Aug and market's rally which had a beneficient effect on sentiment, and on forecasts

Sep 03 08:22 AM

[NotChicken:]

I'm wondering what the basis is for your statement: "American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade". The consumer debt on that balance sheet has grown from 1.5 Trillion to 2.5 Trillion, while assets, adjusted for inflation, have remained flat over the ten year period.

Sep 03 09:20 AM

[Mad Hedge F...:]

hjkll. Never have I seen such a disconnect between the markets and the real economy. All of a sudden the world has gotten expensive. Stock prices have been levitated by vapor. The bulk of the trading volume is now accounted for by worthless zombie stocks like Citibank (C), (AIG), Fannie Mae (FNM), and Freddie Mac (FRE). Cost cutting, not sales growth, has artificially boosted earnings above subterranean forecasts. Commodity prices have soared because of stockpiling and not consumption. Puzzled CEO’s of every stripe are seeing no recovery in their businesses whatsoever. But bears who have sold into the summer rally have gotten a severe spanking. We are left with momentum players and chartists to grind out ever diminishing returns. I have used the big up days to sell short dated out of the money calls in small size which, mercifully, expired worthless, sometimes just by pennies. That’s because I keep my favorite quote from John Maynard Keynes pasted to my monitor; “Markets can remain irrational longer than you can remain liquid.” Better to wait for a more convincing break on the charts before piling on those shorts again.

Sep 03 10:24 AM