“I'll gladly pay you Tuesday for a hamburger today” seems to be the mantra for not only Congress, but of governments around the world as they try to figure out how best to pay for all the borrowing incurred from “helping” the economy over the past three years. While the markets generally cheered better employment figures and modestly better housing numbers, interest in US debt seems to be waning; Portugal and Greek debt remains toxic, and the US consumer can’t seem to put any extra money in their pocket.
In what is becoming a country divided – between those with plenty of income (the few) and those struggling under heavy debt loads and little income (the plenty), there seems to be an awkward feel to the equity markets as investors try to square the short-term better data with the long-term yet unresolved issues. While this week will have plenty of economic data, the focus will be on the upcoming earnings season and just how corporations will be growing margins in the face of higher input prices and modest consumer spending. A good dose of spinach maybe?
The markets put in their best back-to-back week since last summer, closing out the first quarter in style and getting a decent jump on the second. The market internals remain fairly strong and point to further gains ahead; there is uneasiness in the markets. For example, the last few weeks have been marked by relatively strong gains early in the day and a decline in the last hour of trading. While not preceding doom, it may mean the markets trade sideways for the next few months, digesting the gains from the August lows.
Similar to the fourth quarter of ’09, when the markets did go higher, but over an eight to ten month period actually traded sideways. Many of the short and intermediate term indicators remain strong and the implication is that the markets do nothing more than take a break instead of beginning a severe decline. As long as the current leadership in the markets remains (basic materials, small/mid-cap stocks), it bolsters the case for a temporary correction. Any shift “beneath” the markets are not in place for a major shift in equities.
For all the problems around the world (and also here at home), the US treasury market remains the go to market for “safe” investments. The bond model is again positive, which historically has also been positive for stocks, even as commodity prices push ever higher. After the drubbing utility stocks took following the Japanese earthquake, they have recovered nearly all their losses over the past two weeks.
Commodity prices have been front and center of the inflation discussion, with the CRB index rising by over 40% from year ago levels. The last two instances of the CRB index up over 40% saw prices decline within a month, however, we are now entering the third such month this week.
The quarter end gives us a bit of time to review the “big picture” assets to try to glean any changes that may be coming from the equity or bond markets ahead. What has essentially been working since the market bottom in August continues to work today – mid/small cap stocks and more economically sensitive industry groups. Emerging markets were part of the early run higher, however, they took a break beginning in the fourth quarter last year through the end of February.
However, with the renewed push higher by commodity prices and a realization in some quarters that many of the emerging market economies are actually in better shape than their larger cousins, they have roared back in March. After being down as much as 5% on the year, they have now made it back to positive territory, although still trailing the S&P 500 on a performance basis. Yet, what has been good for emerging markets has not yet translated into decent results for the larger foreign markets as their on/off performance relative to the S&P 500 has made it difficult for this asset class to put in the superior performance vs. the various other choices. As such, I would rather buy emerging markets than the developed markets.
Little has changed with the relative performance of the various asset classes, although emerging markets have begun to do well enough to warrant putting money back into those investments. Commodities remain a dangerous, but profitable investment. They have increased tremendously over the past year, but the risks for a sharp decline have also increased. Little has changed in the bond market as well, as short-term and “alternative” and higher yielding instruments like utilities, oil/gas pipelines and preferred issues remain better alternatives than “regular” bond/CD investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.