The Wall of Worry Is Still There But Not As Foreboding
In my last column I made the statement that if only we could ignore Europe, global economic fears would not be so ominous since there were indications the U.S. economic slowdown had bottomed and a nascent recovery might be underway.
We’ve now received more evidence of the latter. The most obvious was Thursday’s report that the U.S. economy grew 2.5% in the third quarter, a substantial improvement over the tepid growth of only 1.3% in the second quarter, and at least temporarily reversing the trend toward recession. New home sales even surprised by rising 5.7% in September, while the inventory of unsold new homes fell to a 6.2 month supply at current sales levels, the lowest level since April, 2010. Retail sales were up 1.1% in September, the biggest increase since February. New housing starts jumped 15% in September to a 17-month high. The Fed’s Philadelphia Manufacturing Index jumped to plus 8.7 in October from minus 17.5 in September, much better than economists’ forecasts.
But it wasn’t all good news. The report on consumer confidence was a shocker. The Conference Board reported that its Consumer Confidence Index plunged in October to 39.8 from the already dismal 46.4 reading in September.
So although the better reports are impressive there is still a wall of worry for the market to climb.
On the other side of the ocean, the euro-zone summit had world leaders and analysts worried right up to the last minute that it might result in a catastrophic failure to reach an agreement of any kind.
We’ll never know what a complete failure of the summit might have done to global stock markets that had been rallying for several weeks on hope that something good would come from the meetings, because officials did hammer out an agreement that has possibilities.
Eurozone nations agreed to increase the European bailout fund (European Financial Stability Facility) from 440 billion euros to 1 trillion euros ($1.39 trillion), not as much as markets hoped for but more than many thought possible. And holders of Greek bonds, mostly international banks and financial firms, agreed to take a 50% write-down on the value of the bonds as their contribution toward resolving Greece’s debt crisis.
But the details of how those goals will be accomplished still have to be worked out. That will keep the talking heads in business for weeks debating the pros and cons and shortfalls of the agreement.
So that wall of worry has not completely gone away either.
And as they say, the market needs a wall of worry to climb when it is rally mode, as the worries keep investors on the sidelines, only tempted to feed cash into the market slowly as prices rise, keeping a rally going. It just doesn’t need as menacing a wall of worry as it has faced since April from fears of the U.S. economic slowdown worsening all the way into a recession, and the potential for a total collapse of the euro-zone that would plunge global financial systems into another crisis.
Perhaps a few more promising economic reports and good news from the housing industry, along with further progress on the European debt crisis, would even reverse the plunge in consumer confidence. Confidence may not be as dire as the index indicates anyway. It was reported Friday that although personal income rose only 0.1% in September, personal spending jumped 0.6%. Consumers seem to have enough confidence to still be spending.
After being bearish all summer and making profits from downside positions, I like what I see in the intermediate-term technical charts. In the background we are also now in the market’s traditional favorable season. Historically the market usually makes most of its gains each year in the winter months.
The important analysis going forward will likely be less focused on market-timing and focused instead on which sectors in the U.S. market are most likely to outshine others, and which global markets will likely benefit most from a recovery in the U.S. economy.
But no one ever said investing is easy. The strongest October in years has the U.S. market quite overbought short-term, especially after Thursday’s spike-up in reaction to the news from the euro-zone summit.
So expect the short-term whip-sawing volatility that has been the dominant feature of the market since August to continue.
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