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Is This As Good As It Gets For Now?

  • Written by Syndicated Publisher 49 Comments49 Comments Comments
    March 3, 2012

    In Europe, the euro-zone debt crisis has pretty much faded from headlines. The arrangements that will bail out Greece – at least for now – have been pretty much finalized. The European Central Bank has made two huge rounds of low cost 3-year loans available to European banks, and that seems to be working to assure that the eurozone financial system will be okay for several years.

    In the U.S. the economic recovery has surprised with its strength since last fall, just about every economic report exceeding consensus forecasts.

    In the stock market, the S&P 500 has gained a big 26% since its low on October 3.

    It is true though that only those who got out of the market for its unfavorable season last summer, and then re-entered in October for the market’s traditional favorable season, have reaped meaningful gains from the rally.

    For others, the rally was needed just to get the market back up to approximately where it was last April, almost no gain in ten months (and considerable pain in the summer correction).

    In addition, most of the gains from the rally were made by those quick enough to see what was coming, with the S&P 500 gaining 13% from October 3 to November 3. Since then the gains have averaged only about 2% a month.

    Interestingly, October was when the outlook seemed to be at its worst. The economy had stumbled badly in the first half of the year, and as the 2nd half began, economic reports coming in for July and August were even worse. Economists were frantically slashing their forecasts. In September, Goldman Sachs cut its forecast for GDP growth to 1% for the 3rd quarter and 1.5% for the 4th quarter, while JP Morgan Chase cut its growth projection to just 1.0% for the 4th quarter, and only 0.5% for the 1st quarter of 2012.

    In Europe, the debt crisis had worsened again, with Greece warning in October that it could not come up with the degree of cost-cutting demanded by the IMF, EU, and ECB in order to receive the next payment on its bailout, which was needed by early November.

    Yet, with those background conditions, and the Dow and S&P 500 down 20%, and investor fear high that the market was dropping into its next bear market, the market instead began to rally.

    And now, the eurozone crisis has faded into the background. The U.S. economy is showing strength that is surprising most everyone. Economists, so gloomy last October, are now raising their forecasts. Investor sentiment, so bearish last October, is now bullish and confident the rally has further to go. Favorable seasonality, at least based on the ‘Sell in May and Go Away’ maxim, has another two months to run.

    Shouldn’t the stock market rally be gaining momentum?

    It isn’t. The Dow has made several additional new highs recently, but didn’t hold onto them, and is barely above its level of mid-February. The DJ Transportation Avg, which frequently leads the rest of the market, has possibly already rolled over into a correction, down 4% over the last four weeks. The popular small stock index, the Russell 2000, is in a similar situation, down more than 3% since early February.

    So is the market saying this is as good as it’s going to get for a while?

    It could be.

    As hedge fund Comstock Partners noted this week in explaining its opinion that “downside risks are now far greater than upside potential again”, over the last 60 years household debt averaged 55% of GDP. It had surged up to an unsustainable 99% of GDP by 2008, as consumers borrowed and spent like never before. Households have been trying to pay off that record debt since the financial collapse. But they have a long way to go to get back to normal levels that would support spending at a pace needed for a sustained recovery, since the percentage of household debt to GDP is so far down only to 88%. Coupled with the still high level of unemployment, that does not bode well for consumer spending to pick up in any sustainable way just yet. And consumer spending accounts for 65% of GDP.

    As if to support the concern that the economic recovery may stumble again, there have been a string of unexpected negative reports recently. Durable Goods Orders fell an unexpected 4.0% in January, after rising 3.2% in December. The national ISM Mfg Index unexpectedly declined in February, to 52.4 from 54.1 in January. Construction Spending unexpectedly slipped in January versus the consensus forecast of economists for another increase.

    Meanwhile, in the eurozone, Greece and Italy no sooner seemed to be out of the woods when Spain warned Friday morning that it will miss the deficit targets it promised the EU for 2012.

    Perhaps the market is worried that this will be as good as it gets for a while.

    So, could the market’s favorable season perhaps end early this year? It’s happened before.

    Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com. He can also be followed on Twitter @streetsmartpost

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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