The Nvest Market Blog, our current thoughts on the Street

Markets Coasting toward Labor Day - Week Ended 8/28/09

posted 08.31.2009 at 09:42 a.m. by steve

In the week ended August 28, the US stock market managed to keep its head above water and add to the advance for the month. However, despite the Dow rising in the last 8 of 9 trading days (streak was snapped Friday), recent gains have been almost un-noticeable. The Dow gained a paltry +0.40% last week, while the NASDAQ and S&P 500 advanced +0.39% and +0.27%, respectively. Trading volume in the most recent two weeks has been extremely light, typical in the weeks leading up to Labor Day. Amid the light volume and mild-tone week, stocks often see-sawed throughout the day, hovering around the break-even level each day (of the total volume traded, over one-third was heavily concentrated in 5 low-quality financial stock names, suggesting overall trading volume is even weaker than the raw numbers suggest). Even the news of the reappointment of Fed Chairman Ben Bernanke, which removed a piece of uncertainty for the markets, failed to have much effect on the markets. Economic and corporate news also has appeared to be of a more mixed tone recently; a notable departure from the more bullish tone that was evident at the end of July and early weeks of August. One comment last week that struck us as particularly true is that it appears investors are becoming tired of having to extrapolate the positive slant from company earnings and economic data points; they now want corporate executives to be issuing more detailed and favorable guidance on their view of the future path of recovery (they still remain cautious to provide optimistic guidance).

Despite the tired tone of the markets recently, upward remains the trend. With one more trading day left in August (today), and the month being solidly in positive territory, it seems safe to say that the S&P has now risen for six consecutive months. And, while the news of late has been decidedly more mixed, some key indicators are showing persistent improvements. For instance, housing appears to have found a bottom. The Case-Shiller home price index showed prices up in June, as did government FHFA data; home sales increased and mortgage applications have been on the rise. Consumer confidence also rebounded during the latest month, but did not make a new cycle high. And, while jobless claims continue to be high and unemployment will likely peak above 10%, claims have remained below their peak for 21 weeks, suggesting that the worst is behind us. This week, volume will likely remain low through the holiday, meaning that market moves this week will have little to offer in terms of providing a story for the future direction. The real test to the recent market rally will likely come next week as trading volume picks up in what has traditionally been a difficult month for stocks (September). The biggest news item to be watched will be same-store sales from retailers as they report how the back-to-school shopping season went. Investors will try and garner insight for how the Christmas retailing environment might look compared with last year.

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Rally and Recovery Continues - Week Ended 8/21/09

posted 08.24.2009 at 09:41 a.m. by steve

Despite another mixed week of economic statistics, US markets worked their way higher in light trading volume. After beginning the week with a major setback (US stocks gapped down over -2% on Monday following weak trading in overseas markets) losses were largely erased by the close on Wednesday. Most impressive was the nearly +2% advance Friday which came with the release of a much better than expected existing home sales report. Housing remains of key concern for investors as it directly affects the health of consumers. With the move Friday, market technicians now believe that momentum has been restored for the current rally, which could help send the market higher. And, as we continue to distance ourselves from the lows in early March, reduced is the possibility that this is just a bear market bounce. All told, the S&P 500 popped +2.20% for the week ended August 21 while the Dow and NASDAQ gained +1.98% and +1.78%, respectively. With the advance last week, we have witnessed the most rapid 50% recovery in the S&P 500 since its inception!

Gains last week were impressive, and we continue to believe that the markets are finding broad support from the massive amount of cash on the sidelines that is being reinvested on weakness. As such, it appears the markets are paying more attention to news and economic data confirming the thesis that an economic recovery is well underway and ignoring signals that might suggest otherwise. For instance, stocks managed to post gains on Thursday, even as unemployment claims rose for a second consecutive week; but the market interpreted the data as an indication that the economy has taken a turn for the better since claims have remained below their peak for 20 straight weeks. With the data for unemployment continuing to be one of the most stubborn points to turn, it becomes increasingly likely that the economic recovery will need to come more from business spending and capital investment rather than consumers (making for a slower growth recovery). As we have said in recent weeks, the focus of markets in the short term will remain the health of consumers. Directly tied to that, there are numerous housing sector data points due out this week. Markets will also be watching back-to-school sales and a survey of personal income for signs of improvement.

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A Mild Pause Amid Weaker News - Week Ended 8/14/09

posted 08.17.2009 at 09:56 a.m. by steve

After four consecutive weeks of stock market gains, the major US indexes took a breather with the S&P 500 sliding -0.85% while the NASDAQ and Dow slipped -0.74% and -0.51%, respectively. Despite 3 of the 5 trading days looking weak, the marginal loss experienced for the week looks like a moral victory. For instance, selling pressure on Tuesday and Friday abated late in the trading session both days for the markets to end well above their lows. Still, ongoing remains the concern that the market has run up too far too fast amid a backdrop of increasing unemployment and uncertainty regarding the health of the consumer. In other words, despite the economic indicators becoming less-bad and sentiment clearly improving worldwide (the recession was declared over in Germany and France) investors worry that the next leg up for stocks will be more difficult to come by. For several weeks now, the pace of gains has slowed and trading volume has declined as an increasing number of people believe that some sort of pause is due. As such, the absence of good news was enough to stall the rally last week; however the decidedly weaker-than-expected news released on Thursday was virtually ignored as the markets rose higher. Most surprising among the data was that retail sales fell -0.1% in July; that number is especially disappointing considering that the hugely successful cash for clunkers program began during the month and was expected to help lift the figure to +0.7%.

While last week represented a minor setback for the markets, increasing is the likelihood that the lows of March 9 will mark the start of a new bull market. Additionally, it is important to remember that no market (bull or bear) moves in a straight line. There will be pauses and corrections along the way. The data last week, with an absence of less-bad or good news, was enough to stall the advance. This week looks as if it will commence with stocks under significant selling pressure as worries about the health of the US consumer continue to weigh on the spirits of investors. Indeed, the health of the consumer is near the top of our list of threats to this advance. Fueling those concerns today are earnings results from home improvement retailer, Lowes which said that sales fell 19% during the second quarter as consumers remain cautious. The fact remains that consumer spending has traditionally accounted for up to two-thirds of GDP in this country and without the consumer, economic recovery will be a long, drawn-out process. As the markets try to quell these worries, investors will be keenly focused on all news this week relating to consumer confidence. Still, we are inclined to believe that any correction will be relatively mild for the reasons that there remains lots of money needing to get reinvested (providing buying support on weakness); and because after 18 months of a bear market, investor expectations that had become so weak are now ripe for lots of positive surprise.

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Unemployment Surprise - Week ended 8/7/09

posted 08.10.2009 at 11:32 a.m. by steve

Most important for the week ended August 7 was the unemployment figure from the Labor Department released Friday, which was a positive surprise for the markets. Key was the fact that payrolls fell by only 247,000 compared to economist expectations for a greater loss of 275,000 non-farm jobs during the month of July. Cash for clunkers (CARS program) also continues to stimulate consumer demand and spawn excitement over 3Q growth. Combined, that news was enough to send the markets notably higher, closing the week at their highest level (on the S&P 500) in over 10 months! The favorable employment news Friday came in contrast to the ADP employment report out earlier in the week, which disappointed the market indicating that more jobs were lost in July than expected. All told, the week that was bookended by strong advances on Monday and Friday (over 1% each), saw the S&P and Dow up +2.33% and +2.16%, respectively while the NASDAQ advanced a more muted +1.10%.

Bottom line: the market has advanced over +15% in just under a month on a news cycle that has markedly become more optimistic. Clearly news is still mixed as evidenced from the various unemployment related reports out last week. Still, the markets seem to increasingly be more focused on heeding the news bytes with an optimistic slant and ignoring those that do not support the economic recovery thesis. That notion is likely best explained by the fact that as we continue to distance ourselves from the lows in early March, investors increasingly feel the need to get the truck loads of low-yielding cash (money market funds), that has been sitting on the sidelines, reinvested. This load of reinvested money is providing great support to the market on days where the news is weak as investors generally try to buy in on days where prices decline (buy low, sell high). We too, have been looking for a market pullback to get clients with the most cash incrementally closer to their long-term investment objectives (asset allocations). Despite having held above-normal cash over the last 18 months in client accounts in order to protect, we still believe that time in the market (rather than timing) the market is the biggest contributor to long-term investment success. Clients just need to be in the market for a long time with a well-defined, disciplined process to be winners. But, as we have written at length about in recent monthly commentaries, we do also believe that we have begun a new normal investment environment. That environment is one in which growth will be harder to come by (for developed economies in particular) and sustain as consumers continue to de-leverage their balance sheets, and corporate credit remains rationed. As previously stated, the next big item to watch in coming weeks will be back-to-school sales; they will act as a barometer for the current health and mindset of the consumer.

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July Ends with 4th Consecutive Week of Gains - Week Ended 7/31/09

posted 08.03.2009 at 12:29 p.m. by steve

US stocks managed to continue their streak higher for a fourth consecutive week. One of the most notable days for equities came Wednesday as US markets managed a moral victory by virtually ignoring the fact that Asian markets dropped significantly earlier that day on concerns that the world stock market has rallied too much too quick considering the still weak economic backdrop. Despite struggling to find direction early in the week, US equity markets shot higher on Thursday on what seemed to be no significant news. Still, while US stock indexes finished higher by about 1%, market technicians expressed some concern over the fact that the momentum in early trading deteriorated as the day wore on (a signal conflicting strength). This late-day fizzle of enthusiasm suggests that the move higher was not as strong as bulls would have liked. For the week, the Dow, S&P and NASDAQ posted small similar-sized gains of +0.86%, +0.84% and +0.64%, respectively.

US markets have jumped over +12% since the beginning of July. As such, it is somewhat surprising to see the markets continue to move ahead (especially as demand for the massive amount of newly issued US government debt looks increasingly weak). Economic news generally remains mixed, but the market seems to be giving more weight to data that supports the economic-recovery-is-underway thesis. For instance, US GDP continued its year-over-year decline in the 2Q09 period, falling -1.0% compared to the period last year while the Chicago PMI made incremental improvement in July; but the conference board measure of consumer confidence fell in July (confirming the recent weakness observed by University of Michigan, ABC and Rasmussen surveys). Perhaps the one area that does seem to be showing more clear signs of stabilization/improvement is the housing sector. In recent weeks, housing related data has continued to look less-bad, which probably explains the strong relative performance of the financial sector stocks. Considering that falling home prices and bad loans are what many blame for the current economic recession, any improvement here is sure to help stoke more optimistic animal spirits. The bottom line is, investors are continuing to shift to a more optimistic beat and bulls are gaining the upper hand over bears. Moving further into the quarter, less-bad news will likely continue to be viewed as good news and could keep the rally running. The key item to watch in coming weeks could be back-to-school sales, which could give the best indication yet of how the consumer is currently holding up. In the interim, the most important item to watch this week will be the Jobs Report this Friday.

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