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NOLTE NOTES The recent release of economic data has made an emphatic point about the US economy – we are not (yet) in a recession. In fact, we may have just experienced a touch and go – with more robust growth now out the front window instead of somewhere out the back. First up was the GDP report – how much have we produced in our economy: and for the second running quarter the economy managed a gain of 0.6% - below the growth of our population, but growth nonetheless. Since no report is perfect, there were a few bumps in this one too – inventories were built (stealing growth from future quarters) and the export market was the final destination for much of what was produced. Then the biggie: employment. Many were braced for a decline of over 100,000 in payroll data, when in fact a mere 20,000 lost jobs. Here too, economists point to the “birth/death” model (new and bankrupt companies) that added over 200,000 jobs and the financial sector actually was shown as adding 8000 jobs – in the face of one of the largest financial meltdowns in history. The financial markets are now expecting a short/shallow recession (that may already be over) and are pricing stocks accordingly – heaven forbid any disappointments! We have been waiting for the markets to make a decision about their 3-month trading range and given the recent pop above 1400 on the SP500, it looks as though higher is where the markets wish to go. As usual, the path is not well paved. Our short-term momentum indicators point to a market that is stretched and in need of a rest. However, the long-term models are allowing for a quick retracement and then ever upward. The number of new highs has expanded to their highest levels all year, while the new lows are among the lowest in nine months. Higher volume remains a concern, however we are seeing more volume on advancing days than declining – a generally bullish sign for stocks. The long-term momentum is looking similar to the 99-00 experience in that momentum on the SP500 actually bottomed early in ’00 and then peaked in October, well after the peak in the OTC market, but in sync with the SP500 peak. Today, the momentum peak came in December ’06, and the markets are unchanged since then, however a few month rally on the heels of Fed cuts and rebate checks could set up for a market peak in early fall. This is a vastly different scenario than we have projected, but the market data combined with still benign economic data point to this real possibility of a trading rally of 7-10% from here. The bond market reacted poorly to the expected Fed cut of one-quarter percent in the Fed Funds rate and fell hard on the much better employment data. Our models actually improved a bit, but still have not given an “all-clear”, so we are focusing our purchases on the shorter maturities. Like stocks, bonds may take a road we didn’t expect. If the economic data remains strong, bond yields will tend to rise over the summer months as investors expect the ending of the rate cut cycle. If, once the rebate money is spent, the economy once again rolls over, we could see a resumption of the decline in bond yields. There will be little economic data for bond investors to feed upon this week, so we could see yields drift higher until perceptions about economic strength change – likely early fall.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.
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