The Nvest Market Blog, our current thoughts on the Street

Worry Re-Emerges over Shape of Recovery - Week Ended 9/25/09

posted 09.28.2009 at 10:30 a.m. by steve

In the week ended September 25, US stocks came under pressure reminding us that despite strong performance month-to-date, worry lingers that markets have recovered too far, too fast given the still very real possibility that the economy could double-dip. Beginning last Wednesday, after the S&P attained fresh new highs for the year, stocks began a 3-consecutive day decline to end the week. Still, the week began with positive economic news as the LEI (leading economic indicators index) rose +0.6% in August, on top of a revised upward gain of +0.9% in July making it the fifth consecutive monthly gain; an occurrence that has never happened with the economy still in recession (suggesting the recession is over). Despite making new highs for 2009 on Tuesday, stocks finished the week below where they started. If one event could be identified as the turning point for the week, it was the release of the Federal Reserve statement following the conclusion of their meeting Wednesday. Despite announcing that the Fed intends to keep interest rates low for an extended period (a stimulative policy), and providing further commentary that the economy is in recovery, markets sold off in sharp fashion late in the day and continued that path through the close on Friday. In sum, the S&P dropped -2.24% for the week while the NASDAQ and Dow gave back -1.97% and -1.58%, respectively.

The path of stock markets last week was disappointing considering that economic news continues to be of a more positive tone. Among that data we continue to see improving numbers coming from the housing sector (excluding the most recent headline reading released Thursday) and an easing of key consumer metrics like slowing unemployment claims. In the latest week, unemployment claims made a downside breakout, suggesting that the number of people losing their jobs is slowing. An interesting tidbit worth noting is that historically, unemployment claims of around -475,000 has historically been consistent with the start of net job creation. Still, all things considered and in light of the ongoing theme of less-bad news, we are probably approaching the point where investors begin to change their tune. The debate on stocks is shifting from recovery vs. no recovery over to sustainability vs. double-dip. This week marks the end of the third quarter for 2009. Most notable before Wednesdays close will be the release of consumer comfort and confidence numbers (due Tuesday), followed by GDP, refinance activity and another employment report (Wednesday). Looking further out, it is worth noting that from a seasonal perspective, the fourth quarter is typically the most beneficial to investors of any season. Looking back at history, this has been even more pronounced in years where stock market performance has already been strong. We hope this trend continues as we move through the final innings of the year, but that will remain largely dependent on how the recovery continues to take shape.

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Economic Data Sends Markets Higher - Week Ended 9/18/09

posted 09.21.2009 at 09:32 a.m. by steve

US stocks advanced for a second consecutive week, adding to their positive performance for the month of September. The three major US indexes gained in similar fashion, with the NASDAQ popping +2.50% while the S&P 500 and Dow edged up +2.45% and +2.24%, respectively for the week. If September can hold onto its month-to-date gains, it would be a seventh consecutive month of positive performance!

Overall, economic news was of the more favorable variant in the most recent week, and stocks posted gains in each trading session except for Thursday. Perhaps most interesting was the ability of the stock market to advance on Monday despite unfavorable news of protectionist trade measures levied between the US and China regarding Chinese-made tires and US chickens. Protectionism, or actions inhibiting free trade between economies, is viewed as a major threat to worldwide economic recovery. Aside from that initial setback, there was much for investors to be positive about. Most notable among the data were releases that showed retail sales strong for the month of August; better than expected industrial production figures indicating strong gains for the manufacturing sector in recent weeks; and continued declines in initial jobless claims (good development) and housing data that continues to suggest a stabilization in home prices.

All told, US stocks continue on their march higher and market technicals (price momentum, breadth, leadership, volume, etc.) continue to show signs of ongoing strength. Most significant this week will be the release of the leading indicators index (today), consumer comfort and sentiment surveys (tomorrow and Friday), existing home sales and unemployment claims (Thursday). If the pattern continues, those releases should continue to show a stabilization and/or improvement in the overall economy. Still, as we draw nearer to the end of the third quarter and approach another earnings season, we would not be surprised to see markets stall out and pause as investors grow anxious and uncertain over what corporate earnings may look like when released next month. While we believe that cost cutting will continue to be the biggest source of earnings improvement, we would not be surprised if top-line gains (revenue growth) begin to make a more significant contribution as well. Consumers as a whole did spend more during the third quarter (with help from Government incentives like Cash for Clunkers and seasonal factors like back-to-school) and sentiment has improved somewhat. So far to date, corporate earnings have surprised consensus expectations to the upside; we believe that it is not unlikely for that to occur with this upcoming next round as well.

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Stocks Move to 2009 Highs Despite Light News - Week Ended 9/11/09

posted 09.14.2009 at 09:51 a.m. by steve

Despite the slow start to September, markets advanced in the latest week pulling the month back into positive territory and helping major US indexes set new highs for the year-to-date. The week did close on a less positive note as Friday snapped a 5-day winning streak for US stocks with its ever so miniscule (-0.14%) decline. All told for the week, the broad market S&P 500 advanced +2.59% while the NASDAQ and Dow gained +3.08% and +1.74%, respectively. It was a good week to be invested.

From a news standpoint, with almost nothing new in the way of economic reports or corporate earnings released, it was a quiet week. Perhaps the most significant stat of the week was the notable rise in the consumer confidence index, which jumped to 70.2; a big improvement from the reading of roughly 66 in August. Economists had been expecting a less notable increase. This week however, looks to be filled with much more in the way of significant economic news. Additionally, we are reminded that today marks the 1-year anniversary of Lehman Bros. failure: the catalyst event for what was the credit crisis. Key among the data this week will be retail sales and consumer comfort (out Tuesday); industrial production (Wednesday); housing starts and unemployment claims (Thursday). But, as we have seen in the most recent months, it seems that economic data continues to positively surprise consensus expectations. That being said, if the third quarter mimics the pattern so far in 2009, stocks could face pressure as we near the end of another calendar quarter and approach yet another new earnings season in several more weeks. But, if the pattern holds, investors will again be positively surprised by earnings that exceed expectations when reported for the third quarter, helping keep the market rally alive heading toward year-end.

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September Begins Under Pressure - Week Ended 9/4/09

posted 09.08.2009 at 09:44 a.m. by steve

In what has historically been the weakest month of the year for US stocks, the first week of September remained true to its reputation. On Tuesday, the first day of the new month, stocks dropped about -2% despite a backdrop of somewhat favorable economic data early in the day. Recent data is suggesting that the recession, which had gripped the economy so tightly through the second quarter of 2009, has ended. Among the reports was much stronger than expected data from the manufacturing sector and the housing market. Despite that selloff, stocks slipped for a fourth consecutive trading session on Wednesday, but losses were small compared to the prior day and trading volume was exceptionally light (even compared to the low volume that is often characteristic ahead of 3-day weekends). But, to the surprise of some, stocks managed to recapture some of the losses sustained early in the week on Thursday and Friday. Friday was the most notable component of the rebound as stocks rallied to end the day up +1.3%. Again the economic backdrop was favorable following continued improvement on the employment front with a favorable jobs-related report. All told, the major indexes still concluded the first week of September in the red: the S&P 500 and Dow gave back in similar fashion -1.22% and -1.08%, respectively while the tech-heavy NASDAQ shed just -0.49%.

While recent reports continue to suggest that the recession has most likely ended, investors remain concerned for several reasons. Chief among those remains the employment picture. While job-related reports have been more favorable (generally speaking) recently and remain well below their crisis peak levels, unemployment does continue to rise (ever closer to the psychologically important 10% figure). However, while it is clear that consumers as a whole have become more frugal in the most recent 12 months, there is evidence that they are willing to spend when given the right incentives (ie: the price is right). This notion/concept fits in with our belief that the US economy will have a New Normal going forward (please take a moment to read our Monthly Commentaries, including the most recent found here: Archive). Still, this is not to say that the new normal economy will not afford investors opportunity for asset value recovery. We are frequently reminded that while current worries (there are many) remain in focus, markets have managed to climb even the steepest walls of worry in the past. As such, given the period which we have just been through, we believe, for a number of reasons (including good technicals, lots of money still to be invested, improving fundamentals, etc), that it is most risky to be short (or out of) the market as we believe a continued advance is more likely than a retest of prior lows. In other words, we feel that any pullback in stocks is likely to be short in terms of duration and shallow in terms of magnitude. In the short term, the seasonal forces of September can continue to put pressure on stock prices; but early indications seem to point confirmation of the recovery-is-underway thesis.

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