The stock market usually figures out what lies ahead for the economy well before economists and the Fed catch on.
That can be seen in the way the market rolls over into a bear market when conditions are still looking great, when investor sentiment is at high levels of bullishness and optimism, when economists are projecting the positive trend to continue in a straight line into the future, and usually turns back up into the next bull market when sentiment is bearish and well before the economy shows signs of pulling out of a recession.
That was most recently seen in the way the stock market topped out into the 2007-2009 bear market prior to the 2008-2009 recession, while economists and the Fed were still saying the problems in the housing sector and sub-prime mortgages would be confined to housing and would not affect the overall economy.
Then in early March, 2009, when the 2008-2009 financial meltdown seemed at its worst, near panic that the economy was headed still lower into the next Great Depression, the widespread opinion being that the massive bailouts by the government could not possibly work, the stock market launched into what has become an impressive four-year bull market.
And sure enough the recession ended four months later in June, 2009 and the economy began its recovery.
It could be seen in shorter-term market moves in each of the last three years, when the stock market rolled over into corrections each spring foretelling the economic slowdowns in each of the last three summers, and then recovered in the summer and fall with the economic recovery getting back on track.
So does the market still have the economic outlook nailed?
Analysts have been calling for a short-term market pullback to alleviate the overbought condition for several weeks now. Some are convinced it will be more than just a pullback, more likely the end of the rally off the November low.
Still others were convinced the economy was already rolling over into its next recession even before the reports this week that consumer confidence plunged in January, and the bigger shock, that GDP growth turned negative in the December quarter, dropping to minus 0.1% compared to the consensus forecast for growth of 1.1%. It was the first quarter of economic contraction since 2009, and is halfway to the two straight quarters of negative GDP that is the official line that marks a recession.
And on Friday, it was reported that there were only 157,000 new jobs added in January, and the unemployment rate rose to 7.9% from 7.8%, versus the consensus forecast of economists for 170,000 new jobs, and a decline in the unemployment rate to 7.7%.
Yet the Dow, which could have reasonably plunged 300 or 400 points in at least a temporary knee jerk reaction to each of those three unexpected negative reports, paid little to no attention.
So does the market still have the economy figured out?
If so it seems to be saying the economic recovery is intact and the economy is not headed for trouble.
Or is it just a temporary seasonal thing? The market is in its traditional favorable season of November to May when extra chunks of money flow in automatically, particularly in December and January, from year-end fund distributions, year-end corporate contributions to profit-sharing, pension, IRA, 401K plans, and so on.
And as we’ve been reminding our subscribers, the market is also in a short-term favorable period that I’ve always referred to as the ‘monthly strength period’. The market has a very consistent pattern of being up the last two days of each month and the first four trading days of the following month. It’s the influence of sizable extra chunks of money flowing in at month ends, including from monthly stock and bond dividends, month-end contributions to 401K and IRA plans, those who follow a strategy of dollar-cost averaging into the market on a monthly basis, and so on.
So perhaps we’ll at least see that short-term pullback from the overbought condition when the ‘monthly strength period’ ends.
But my technical indicators remain on a buy signal, and particularly with the market’s benign reaction to the unexpected negative economic reports this week, nothing has changed in my forecast of a significant favorable season rally until April or May (a temporary setback from the short-term overbought condition notwithstanding), and then for the market to run into trouble, as it anticipates problems for the economy resulting from government spending cuts to bring budget deficits under control, or the Fed beginning to remove the stimulus punch bowl, a return of the euro-zone debt crisis, or of inflation finally beginning to show up.
But for now, the market seems to see no imminent problem for the economy, in spite of the negative reports this week on consumer sentiment, negative GDP growth, and the tick up in the unemployment rate.
