Over the years, the adage about “selling May and going away” has actually been very good advice, as stocks have generated the vast majority of their performance in the time period between late November and early May. This year this advice is shaping up to be at the very least a good suggestion, as equity markets have now rallied on a scale not seen since the early 1930’s, when judged on the amount of percentage gain squeezed into a given period of time.
Over the course of the past two months we have witnessed some stabilization in the financial markets as stocks have staged a strong rally and credit spreads have come down. While we have seen stabilization in the financial markets since the March lows the stabilization process actually began after the October 2008 panic lows.
One of the arguments that deflationists have as to why prices will stay low is the incredible degree of slack in manufacturing capacity. Currently there is sizable slack in manufacturing capacity as the utilization rate fell to 69.26% in March.
In keeping with our update of 4/07/09 and 4/14/09, “The Eye of the Storm” economic data is now showing clear signs of a bounce typified in today’s headlines which showed both an improvement in Consumer Sentiment and in the Housing Markets. Earlier today, the Conference Board announced that its survey for Consumer Confidence experienced its fourth largest monthly gain on record moving up to a reading of 39.20 in April, up from 26.90 in March.
The onset of a new strain of swine influenza A/H1N1 with 20 confirmed cases in the U.S. over the weekend shocked the financial markets Monday. The World Health Organization (WHO) grew this figure to 40 confirmed cases now in the U.S. The number of confirmed cases in Mexico is 26 as of today.
As I noted last week, the odds are high that in the coming months an inventory replenishment cycle will likely unfold, and in the process will give some long overdue lift to the moribund economic data. In my last article, I also tried to point out that while the headline numbers are bound to improve, that despite the improved news headlines, very little else is likely to have anything but an ongoing ‘recession' feel.
While much of the financial media are focused on “Green Shoots” and the possibility of an economic recovery, the road ahead will certainly not be smooth sailing as many economic “weeds” still remain. However, the presence of these green shoots does indicate that the path to an anemic recovery is developing, which the markets are likely snuffing out.
There are statistical ‘turns’ in the economy and then there is the ‘real deal.’ The “real deal” is defined by an actual improvement in the economy on Mainstreet in terms of material job creation, better wages, higher productivity, etc. None of that is likely to happen for some time as the US economy is undergoing what will be a structural change likely to last five years or more.
In last week’s article, “Fixed on the VIX,” I highlighted how important the VIX is as a valuable technical as well as fundamental indicator as it shows a strong correlation to many other indicators (ISM reports, employment, S&P 500, bond spreads, etc…).
In last week's review, we spent some time looking at the equity market from a dispassionate stance, first dwelling on some of the more potentially negative outcomes. In this week's update, we are going to spend some time looking to set up some parameters for getting a better idea of precisely what a “better than expected” stock market outcome might be.