The Nvest Market Blog, our current thoughts on the Street

Markets Manage a Moral Victory

posted 06.29.2009 at 09:29 a.m. by steve

The US stock market managed to finish the week almost where it began, despite a rattling start. On the heels of the first down week since early May, the S&P 500 lost -3.38% last Monday and closed below 900 for the first time in over a month after the World Bank estimated that the global economy will fare worse than expected declines in 2009. The release dealt a major setback for those previously trying to believe the green shoots story, and increasingly suggests that the spring rally began in early March will now need good economic news, not just less-bad news, to push forward.

While the decline Monday renewed the debate about where the economy is truly headed, the move came in extremely light volume suggesting that a lack of buyers, rather than a wave of sellers, provoked the meltdown. Tuesday and Wednesday the markets managed to tread water (posting very negligible gains) despite the US treasury auctioning off record amounts of new debt to finance Government spending plans. The next notable day for the stock markets came on Thursday, as the major indexes managed to chug their way higher, up +2.14% on the S&P, largely erasing the Monday setback. That advance was driven by as handful of better-than-expected earnings announcements from homebuilders, retailers and other consumer discretionary stocks. The net result for the week ended Friday was a slight loss on both the S&P and the Dow (-0.26% and -1.19%, respectively) while the NASDAQ managed to post a modest gain (+0.59%).

US stock markets posted a moral victory last week despite ongoing and increasingly pervasive worries of huge Government deficits and weak consumer spending (and a lengthy deleveraging process). Markets remain extremely cautious about the recovery moving forward as the state of the consumer continues to be a big question mark. Friday, the Commerce Department indicated that consumer spending edged up by +0.3% during the month of May. However, the real change for the consumer is told by the rapid rise in his savings rate, which rose to +6.9%; that figure is the highest reading since 1993. In an economy where the consumer accounts for over two-thirds of total economic activity (the United States), small changes in consumer behavior have huge impacts on the pace of productivity and growth. As such, the markets may struggle to find convincing direction in the coming weeks as the 2Q comes to an end and investors prepare for another round of corporate earnings. Stay tuned; without much anticipated volume in either direction this week (holiday-shortened), it will be difficult to get a true sense for what daily price swings mean for the longer-term outlook.

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Rally Under Pressure

posted 06.22.2009 at 10:21 a.m. by steve

Stocks finished the week lower for the first time since early May, noted by a decline in the Dow of -2.95% while the S&P and NASDAQ forfeited -2.64% and -1.66%, respectively. On the down days last week (4 of 5), volume was generally elevated (although still low due to seasonal factors) suggesting distribution days and profit taking. The bulk of the damage was borne on Monday as the US stock market opened down more than 1%. Selling pressure intensified throughout the day with economic data being released that continues to suggest the world economy has significant hurdles to overcome. Also pressuring the markets may have been uncertainty stemming from the evolving proposals of the Obama administration about how financial market regulation will look going forward. Further, recent data suggests that the market may have become too optimistic about green shoots and will need to begin seeing good news (instead of just less-bad news) to continue justifying the 3-month long rally and more importantly, the next advance higher.

While last week was the most decisive correction since the current rally began in early March, there are a number of data points to suggest that the recession might indeed be over (although any real economic growth would surely be at a very anemic pace). For instance, the 4-week average unemployment claims number has declined by -43,000; a figure that in the past has marked the end of recessions. Additionally, manufacturer inventories continue to be drawn lower, suggesting that at some point in the not too distant future, industrial production will have to increase in order to replenish inventories and also continue making products that businesses and consumers buy. Of interest are other miscellaneous indications that the economic situation is no longer deteriorating. Among them are US pending house sales up +12.3%; furniture buying has increased +9.3%; vehicle sales have risen by +8.8%; and golf membership rates are on the rise. Still, in the near term, interest rates (rising) continue to pressure the recovery as the US government is set to issue a record amount of debt this week to continue financing its ambitious spending plans for the current year. As such, bond vigilantes are increasingly worried about larger deficits and problematic inflation in the intermediate- to long-term.

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Shift to More Bullish Tone Continues

posted 06.15.2009 at 09:49 a.m. by steve

The US stock market managed to nudge its way higher last week as the S&P 500 rose +0.65% while the NASDAQ and Dow gained +0.51% and +0.41%, respectively. Trading volume remained light throughout the week; a not uncommon characteristic for the month of June. However, in recent weeks, the rally that had been so powerful (beginning back on March 10) now seems to have lost its momentum in recent weeks. The markets have felt like they are treading water, rather than making any significant progress. Indeed, the real story of the last several weeks has been in the bond market as the US treasury continues to issue a seemingly bottomless supply of new debt to finance government spending plans. Yields on the benchmark 10-year treasury briefly topped 4% last week (prices fell); a level not witnessed in over 8 months. It seems that the bond vigilantes are once again making known their concerns about huge government deficits (now and into the future) by pushing up the cost of financing for the treasury department through higher yields.

As we have discussed in recent writings, interest rate hic-ups or spikes are common during economic recoveries. However, interest rate hic-ups may have an enhanced ability to have negative effects on the recovery as the current financial crisis has been so closely tied to the interest-rate sensitive housing market and short-term financing markets. Rising interest rates for the US government surely mean rising interest rates for home mortgages and business loans, as their levels are directly tied to treasury-issued debt. In addition, the US dollar has weakened significantly against world currencies and oil, being used as a hedge, has shot higher. While a weakening dollar makes US labor more competitive in the global marketplace, higher oil prices are coming at a time when the consumer remains extremely weak. Still, the number of investors shifting over into the bullish camp (from the bearish one) has been impressive. According to Investors Intelligence surveys, the number of bulls now outnumbers bears for the first time since late-2007. This is remarkable considering how dire the environment has been over the past year. The tone is clearly shifting as the end of the second quarter approaches. And, institutional investors find themselves struggling to put cash to work after the strong push by the market higher. All of the money remaining on the sidelines is one very valid reason to believe that the stock market has a lot of support for current prices.

One perspective that remains, and that poses challenge for the market moving forward, is that for the market to continue its thrust higher, there needs to be a more prominent catalyst than just waning investor pessimism. Good news will need to start appearing; not just more less-bad news.

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Rally, Almost 3 Months Old, Continues Advance

posted 06.08.2009 at 09:54 a.m. by steve

The spring rally that began on March 10 will turn 3 months old this Wednesday, having added almost +40% on the S&P 500 from the March 9 low to the rally peak (hit last Tuesday). Despite that impressive up-move, it is the first time since early January when the S&P 500 has finished in positive territory for the year-to-date period. Our client portfolios of all objectives continue to be beat the broad stock index for the year-to-date period while holding above-normal cash positions. All told for the week, the NASDAQ popped +4.23% while the Dow gained +3.09% and the S&P rose +2.28%. Still, the up-move fails to tell the story for the week, which began with longtime American industrial icon General Motors filing for bankruptcy (widely expected) and treasury prices plummeting (yields spiking) in the face of massive federal debt issuance. Despite those two bleak headlines, there was good news including that from large US banks successfully issuing new equity (raising capital to restore health and stability to their balance sheets) and some new data suggesting that home sales are improving.

As strong as the percentage gains last week look on paper, the move higher was less impressive from a technical standpoint. Trading volume fell significantly throughout the week, suggesting that enthusiasm is beginning to wane. Further, it suggests that there is little conviction as to what the direction of the market should be moving forward from these elevated levels (relative to just a couple months ago). This week, the market is set to open lower and could face pressure as investors increasingly worry about rising interest rates (yields). There seem to be an ever increasing number of stories out of China, our (United States) biggest creditor, suggesting that it is is becoming more concerned about the levels of debt our government is willing to take on. A spike in interest rates (yields) could threaten the economic recovery as it makes the task of obtaining financing (for the US government as well as consumers and businesses) more costly. This phenomenon is also known as an interest rate hic-up.

Interest rate hic-ups, while troubling, are not uncommon during strong stock market recoveries. We do believe that the worst days for the stock market are behind us (although a retreat may be due). The lows have likely been set for this cycle. The trick for the economy now will be continuing to recover in the face of oil prices that continue to rise (hurting an already weak consumer) and keeping borrowing costs low (helping housing find a recovery point). For more on the path forward, please take a moment to read through our latest monthly commentary, A New Normal Future (click here).

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Third Consecutive Month of Gains

posted 06.01.2009 at 11:21 a.m. by steve

The month of May again concluded in the black, making it the third consecutive month of gains for the stock market. The holiday shortened trading week managed to finish higher on 3 of the 4 days with the S&P advancing +3.62%, the NASDAQ adding +3.09% and Dow rising +2.69% despite unsettling news on several different fronts. For instance, markets were able to virtually ignore drama coming out of geopolitical antagonist North Korea early in the week and instead focus on significantly better-than-expected surveys coming from the Dallas and Richmond Fed indexes on the economy Tuesday. Wednesday, the only down-day of the week for the US stock market, stocks and bonds came under steep pressure as huge US government treasury auctions caused concern over a deteriorating long-term fiscal situation for the country. The remainder of the week, markets managed to work their way higher, despite ever increasing certainty as the week wore on that General Motors ultimate fate would be filing for bankruptcy today, June 1.

While the current rally remains a welcome change from declines over the past year and a half, we remain surprised at the ability of this market to continue its march higher. At the present, we are looking for an opportunity to increase client equity exposure on market weakness; we believe stocks should give back some (not all) of the recent gains as there remain some significant threats. Among them include higher oil prices (which are translating to gasoline prices that have risen by over 40% since January), increasing unemployment, and rising interest rates that threaten to choke off recovery before it really ever gets started. Diving deeper into the interest rate issue; the bond market vigilantes voiced their concern over a US government that continues to take on ever increasing amounts of debt to finance spending plans. As a result, treasury yields spiked on Wednesday (prices fell), sending mortgage rates notably higher than their recent lows, and the stock market reeled on the development.

As we begin the first week of June (a tough month for stocks historically as volume languishes) the markets are beginning with a step forward, even in spite of GM announcing bankruptcy. At the moment, the stock market appears determined to continue its advance; the biggest threat to that progress remains the interest rate environment, which is likely to experience more pressure considering the boat load of new debt still yet to be auctioned in the markets.

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