Has the Funeral Been Postponed?

Includes: FCHI, SPY, VGK
by: David Moenning

August was a painful month for the stock market, beginning at the highs of the current range, and ending right near the lows. Economic data was bad, sentiment was worse, and the media seemed like it was prepping its readers for its newest TV show, “Econopocalypse”, starring the ever-so-popular Recession McDoubleDip.

While the market environment was by no means good in August, towards the end of the month I had a similar feeling to the one I had around the 4th of July. “This seems a bit… dramatic.” The only difference was that around July 4th, financial Europe looked like it was going to sink. Now, the situation is relatively under control.

Markets price in bad news, especially in a news-driven environment, and the news coming in indicated that the recovery was slowing down. There were positive pieces of data, but the general fear investors had over another recession, doomsday indicators, death crosses, etc, wouldn’t let the bulls make any progress. Treasury yields were even approaching their 2008 financial crisis lows. The negativity in the market was too strong.

Then September 1st came along. At 10:00am EST the Institute of Supply Managers (ISM) announced that their August manufacturing figure rose to 56.3 versus a consensus 53. Prices paid jumped up to 61.5 vs. consensus 55, and employment rose for the 9th straight month.

Challenger reported that US planned job cuts declined to 34,768 in August versus 41,676 in July, a sign that the employment figure may be starting to turn around.

In global markets, China’s PMI came in at 51.7 versus 51.5. Australia’s Q2 GDP rose more than expected to 1.2% versus a consensus of 0.9%, and eurozone manufacturing was up to 55.1 versus preliminary 55.

For the most part, the data this morning was a huge relief for the bulls. Stocks surged on the ISM news, with the S&P 500 gaining 2.95% by the close. Traders appeared to be pricing in positive consumer confidence and home price index data that failed to garner a rally yesterday.

While there is still plenty of news this week, including the always-important jobs report on Friday, The rally today sent the message – The economy’s funeral has been postponed.

While economic conditions remain unfavorable, there are a few basic things that we need to keep in mind before the investment media starts preaching the end of the world again:

1. The Fed stands ready and willing to act, and they have ideas. While their policies aren’t as potent as they were in 2008, but they can still provide some substantial support via extended easing.
2. The last time that the talk of a double dip was popular, European credit markets were on the verge of freezing and the country of Greece looked like it was going under. That market has stabilized.
3. Over the summer, talks of China’s rapidly slowing growth figure contributed to a “macro-recession” fear. It’s true that China’s growth figure was slowing, but it was still a HUGE number. Since then, growth has accelerated, and China’s immense population suggests that that pace will sustain, at least for a while.
4. While the US’s Q2 GDP estimates were revised downward, there was still a + sign in front of the number, not a minus sign.
5. If you actually look at the GDP data, the downward revision was attributed mostly to the US trade gap. Our trade gap showed imports exceeding exports by a larger than expected margin. However, the trade gap and its negative effect on the GDP number fails to capture the point – that consumers are buying again. The demand appears to be there.
6. The ISM data this morning was encouraging. The institute asked the suppliers how demand was, and they replied, “demand is pretty good.” Any level above 50 on the index is enough to shrug off recession-worries. Wednesday’s report came in at 56.3.
7. The first “dip” came from the greatest financial meltdown in the history of our country since the Great Depression, causing a global recession and reformation of our structural financial laws. Some summer data about a slower paced recovery doesn’t seem quite as severe. While we could go lower, it would be a stretch to go that low.
8. We are and will continue to be in a trading range until something significant happens. At least more significant than a mixed bag of data and some odd verbiage.

This isn’t a list of reasons why the market won’t go down any further, and is in no way a justification to the argument that we are recession-proof right now. The point is, while the current environment is “unusually uncertain” and sentiment moving forward is slightly negative, the big picture doesn’t look double-dip worthy just yet.

That being said, it will be interesting to see how the environment changes over the next few months. There are still quite a few issues that will continue to worry investors, such as whispers of bubbles in treasuries and gold, US debt, and deflationary pressures.

Disclosure: No positions