Still Not Out of Woods: A Story of Poor Macro-Economic Indicators

Aug. 9.10 | About: SPDR S&P (SPY)

The last 30 days turned out to be yet another phase in the roller coaster ride this market has taken us over the past 6-12 months. Thanks to a positive earnings season, after hitting lows around 9600, the DJIA has hit back to 10,500+ levels, and so has been the upward correction in emerging market indices.

However, the earnings season will be soon be over - and macro economic indicators will again take precedence in determining market direction. Let's take a quick look at some key statistics to see how key indicators have been trending over the past 6 months:

Jan-10 Feb-10 Mar-10 Apr-10 May-10 June-10 July-10
Personal Consumption Expenditure (% Change) 0.20% 0.50% 0.50% -0.10% 0.10% 0.00%
Unemployment Rate (%) 9.70% 9.70% 9.70% 9.90% 9.70% 9.50% 9.50%
ISM Index (Non Manufacturing) 50.5 53 55.4 55.4 55.4 53.8 54.3
ISM Index (PMI) 58.4 56.5 59.6 60.4 59.7 56.2 55.5
Bank Lending (USD Trillion) 1.80% -4.00% -3.00% -6.40% -2.60% -0.70%
New Home Sales (Annualized) 349000 347000 384000 422000 267000 330000
Click to enlarge
  • Personal consumption expenditure picked up steam during Q4 2009 and Q1 2010; however the trend has been mixed-to-declining during Q2. With personal consumption driving over 70% of the GDP, there is clearly no positive upward rend at this point.
  • The unemployment rate has not shown any signs of speedy correction - job growth was anemic (38,000 per month average) in the private sector over the last 6 months, and in fact dropped in the public sector due to the end of the decennial census effort. Given this and general industry sentiment, the unemployment rate would probably continue to hover around the mid-9s for the rest of the year.
  • Services growth has not been steady too - and with this sector contributing over 80% of the GDP, growth impetus is clearly missing
  • An inventory led manufacturing growth in late '09 and early '10 is slowly tapering down - and would need clear signs of demand pickup before inventory build up rate continues. Inventories reportedly dropped in July '10 possibly in anticipation of lackluster demand growth
  • Seasonally adjusted bank lending (consumer credit) growth has been negative 5 of the past 6 months and this doesn't help any way in driving growth in consumer spending
  • Despite extension of the deadline for the 8k federal stimulus, new and existing home sales have not grown in line with expectations. However, inventory levels are at rock bottom, at less than 7.5 months sales - this, combined with a low interest rate scenario should help in a gradual recovery in this sector.

On the sentiment front, the consumer confidence index too declined in July - that too, after a drastic drop in June. As per the conference board's survey, close to 43.6% of respondents opined that business conditions are "bad."

Earnings will struggle to keep up % growth rates of the last few quarters too, now that YOY comparisons with the worst quarters are behind us - thus, it is difficult to assume any continued impetus from earnings news for Q3 and Q4.

Given the above context, there clearly is not enough factors to drive a sustained recovery - though there are not any clear indicators of a double dip either, unlike what some economists have predicted. Government stimulus measures would be limited considering deficit pressures, and there is little room to move on the monetary policy front, with interest rates near historical lows. Given neutral-to-negative conditions in Europe and similar conditions in emerging markets, there is a lack of global factors acting as a growth simulus. In fact, there are possible downside risks - the Chinese government's latest guidelines on bank stress testing (to factor in a up-to 60% drop in some regions) clearly highlight the same.

Bill Gross seem to have predicted the situation the best, a long way back - a new normal with tempered/slow growth rates globally, especially in the US. Though i personally don't completely agree with folks who recommend heavy weighting towards gold/commodities (especially with where gold trades currently!), there is little reason to stay invested in stocks either. Fixed Income might take a beating too, especially on the high-yield side - primarily due to an irrational spike in demand over the past few quarters.

That leaves us with very little options - but as usual, stay in cash and play the market swings if you have the guts to do it. WIthin the sectors, I would favor technology, staples and financial services.

Disclosure: No positions