The last 8 weeks have not been kind to investors in the market. Nor have they been kind to the prospects for robust economic growth going forward. Unfortunately, these disappointing trends are likely to continue over the next six months. I don’t think we should look for good performance in the market or in the economy for the second half of the year. 10 reasons to be cautionary about the second half of the year:
1. Not only was first quarter growth disappointing at 1.9%, but the predictions for more robust growth in the second quarter have vaporized in recent weeks and we are likely have about the same sluggish growth as was achieved in the first quarter. Unfortunately, this level of performance will not produce job growth or provide a good backdrop for consistently growing earnings and revenues for equities.
2. Payroll tax withholding is slowing down. This reflects slowing hiring, although this measure does not yet indicate mass layoffs are on the way. However, it does confirm the slow growth in monthly hiring numbers might stay with us awhile.
3. The market cannot hold rallies. The last hour of trading has consistently brought out the sellers, reducing gains for the day or accelerating losses.
4. Because of the poor way the Federal Stimulus was designed in 2009, most of the money went to local and state governments (the majority of it to public employees). Unfortunately, because we have not gotten the growth we usually expect coming out of a recession, state and local governments are now being forced to lay off workers to bring some of their structural problems under control. This has resulted in over 300,000 job losses in the last year.
5. Not only is the housing market not getting better, it appears to be getting worse. This will remain a drag for the rest of 2011 and could tip the economy into another recession in 2012 according to Gary Shilling.
6. QE2 ends in a week and the debt ceiling talks are at an impasse. The headlines and recriminations are likely to get ugly and have potential to rile the markets, until some sort of last minute deal is reached.
7. If that is not enough, after these events have occurred and/or are resolved, the market will turn its attention to the end of the Federal Stimulus, curtailing of the extension of unemployment benefits and expiration of the payroll tax cut at the end of the year.
8. The market is hovering just over its 200 day moving average of 1263 on the S&P. It has bounced off this level twice in June. If it breaks under this level, we could have an accelerated selloff.
9. The release of oil from the strategic reserves smacks of political desperation, is unlikely to do anything about the gas prices in the medium or long term, and might invite retaliation from OPEC.
10. Speaking of ill thought out government actions, the recent moves by the NLRB against Boeing combined with the relentless expansion of regulatory actions by the FTC, S.E.C., EPA and myriad other agencies certainly aren’t helping business confidence or the prospects for job growth.