U.S. Market: Too Soon to Call a Bottom

Includes: DIA, IYR, QQQ, RTH, SPY
by: FP Trading Desk

Higher retail sales in January and a sharp jump in housing starts in February are encouraging news for the U.S. economy but hardly enough fodder to call a market bottom. The stock market rally over the past few sessions was initiated by a rebound in financial shares that - much like the economic data - represents a rebound from highly depressed levels.

The headline grabbing jump in housing starts--the biggest rise since January 1990-is less compelling when put under the microscope. For one thing, it is a bounce off 1960s levels; for another, it was skewed to multi-family units spurred by renters rather than buyers which is a sign of the weakness in single family housing according to Barry Ritholtz of The Big Picture blog.

A revised 1.8% rise in retail sale in January coinciding with a 0.1% fall for February suggests that the U.S. consumer is making a comeback. It is difficult to reconcile this data with the massive fall in household wealth, caused by falling house and equity prices, and the rise in household savings rates. Savings rates at-- at roughly 3% of GDP-- are about 9% below rates seen in past recessions in the early 70s and early 80s and about 4.5% below rates seen in the early 90s recession.

Falling gasoline prices and lower taxation rates will put more money in consumers' pockets. However, lower taxes are unlikely to lead to more spending. U.S. households are highly indebted and have less access to or interest in additional credit. It is too soon to call a bottom.