The Nvest Market Blog, our current thoughts on the Street

Bumpy Journey Continues as News Turns Weak - Week Ended 6/25/10

posted 06.28.2010 at 10:00 a.m. by steve

Following a two week rally, equity markets again turned decidedly south against a backdrop of weak economic data and a news cycle that seems relentless in its attack on investor confidence. The S&P 500 receded roughly -4% and indexes are again negative for 2010. Initially, the week looked set to extend recent advance on news that China will begin to let its currency float in a sign that global economic rebalancing can begin to occur. A stronger Chinese Yuan would be good for US manufacturers in that American goods would be more attractive to US consumers compared to imports from Asia. Still, despite the news, stocks declined on four of the five trading days, largely giving back what has been recovered since June 7. In fact, the news over the weekend regarding China seemed to feel as if it was the ONLY tidbit of good news to be received throughout the week.

Most notably, housing continues to look staggeringly weak. Several housing-related reports indicated significant weakness following the expiration of homebuyer tax credits (April); and, home sales fell to their lowest level on an annualized basis since data was first tracked dating back to the 1960s. While it should have come as no surprise to the markets considering that the housing credit would pull demand forward and steal from future months just as the widely successful cash for clunkers program did, the headline was just too sad to ignore. Outside of housing, consumer and employment related data showed slight improvement, but still seems stuck in a channel that is softer than data investors were getting used to earlier this year. Markets also continue to battle the worries and uncertainty that loom over new financial regulations, tax extenders, Gulf oil spill difficulties and of course Europe to name the most significant. Bottom line; it remains extremely difficult for consumers and businesses alike to feel any confidence of what the future looks like. Uncertainty and a variety of outcomes remain palatable, leaving all parties feeling as though playing it safe is perhaps the best way to go.

Still, in the face of this dramatic uncertainty, we believe that the most contrarian view among investors is that equities are the greatest opportunity over the long-term. Evidenced by the fact that bond funds continue to receive inflows at a rate of 17:1 the rate of equity funds; or the fact that equity mutual fund flows are actually negative over the last 15 months; treasuries continue to trade at ridiculously low yields (high prices) suggest that investors continue to invest by their emotions, looking in the rearview mirror of the past decade (bonds outperformed stocks) assuming that it will continue indefinitely into the future. We do not share this view. And, apparently neither does a very well known, world admired bond manager, PIMCO. With over $1 trillion in fixed income assets under management (the largest of any fund company), PIMCO announced that it is opening several new equity mutual funds. Reading between the lines: why would an immensely successful bond manager start equity funds against this current backdrop??? Might they believe that bonds are expensive and overvalued? Might they believe that equities are the unloved, under-appreciated asset class best positioned for future gains?? Time will tell

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Second Week of Gains Puts Indexes Back in the Black for 2010 - Week Ended 6/18/10

posted 06.21.2010 at 09:00 a.m. by steve

Stocks behaved themselves for a second consecutive week, rising back above the level of the 200-day moving average (an important technical level). Stocks rose in 4 of the 5 trading sessions with the biggest advance occurring on Tuesday as indexes rose sharply by more than 2%. That helped the week end +2.37% for the broad S&P 500 (and returning indexes to positive territory for 2010), despite Greece being downgraded to junk status by Moodys (largely expected) and economic data that was generally worse than expected. Meanwhile, Gold managed to also make new highs in what has become a bet against fiat currencies rather than an inflation-hedge. Credit spreads (a key barometer of perceived risk between lenders and debtors) remain elevated from the favorable levels earlier this year, but stable in recent weeks. Still, without significant improvement in credit spreads (narrowing), many believe that the recent improvement in equity market behavior is only a short-term bounce from the extreme oversold condition that had developed during the month of May and early days of June. Uncertainty over the market remains however, as evidenced by the wide range of views by economists and varying forecasts present.

Economic data news was decidedly weaker in the latest week and one thing that has become readily apparent through watching of various data points is that the domestic economic recovery stands in sharp dichotomy. Manufacturing and industrial production are robust, while housing-related sectors are flat at best. Consumer sentiment as reported in the former week continues to remain resilient at favorable levels, but unemployment is stubbornly high according to weekly unemployment claim figures. In fact, unemployment claims rose in the latest week, suggesting that jobs remain a challenge to get. But, against a backdrop of weaker than hoped-for economic news, stocks did manage to behave themselves, suggesting that bears may have exhausted their selling pressure and bulls are once again taking control of daily moves. This week looks set to extend the recent market recovery, as China announced over the weekend an easing of its monetary policy which suggests a stimulative effect on its already fast growing economy. The biggest items on the economic calendar this week are existing home sales (likely to be weak), durable goods orders (expect strong) and the FOMC meeting announcement on Wednesday. Stay tuned!

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A Sigh of Relief for Investors After Weeks of Declines - Week Ended 6/11/10

posted 06.14.2010 at 10:20 a.m. by steve

Stocks had their best week since March with the majority of the gains coming from a 273 point rally on the Dow Thursday, helping the most widely reported index recapture 10,000. Stocks managed also to extend those gains into a second day Friday (an occurrence that has become extremely rare since late-April), despite a weaker than expected retail sales figure. The week was not without its fits, as stocks again opened under selling pressure and Europe worries. All told, the S&P and other major domestic indexes gained roughly +2.5% in the five days ending June 11. Perhaps the biggest news came on Thursday when China announced that its economic activity was significantly more robust than even optimistic estimates, suggesting that a weak Euro currency is having less of a negative impact on export-oriented economies (like China). The fear had been that a weakening Eurozone could pull the world economy back into a double-dip instead of remaining a more isolated event. It should go without saying that the news of the last week does not erase the worry that has been so prevalent since late April. But, it does help investors feel that markets have been too pessimistic when assessing recent events in Europe.

Economic data continues to suggest that the US economy and other developed nations are currently in the midst of an economic soft patch (but still advancing). The news last week of falling retail sales in May, and housing data which continues to deteriorate following expiration of Government sponsored incentives; and stubborn levels of new jobless claims does remain troubling. That being said, monetary policy remains extremely accommodative and the money supply has increased for 6 consecutive weeks. The recent worries are likely to provide ample reason for central banks to keep rates low longer. Additionally, corporate balance sheets are now more flush with cash than at any time in history, suggesting they are well positioned to sustain the recovery (through continued hiring and capital spending) should their confidence improve enough to loosen the grip on their wallets. The most likely economic environment we believe is slow, choppy but positive growth.

This week we will be focused on data from the manufacturing sector, import/export prices, housing sector and jobless claims. We are interested to see how stocks interact with technical levels of resistance for the technical backdrop to reassert itself in a positive fashion. Meanwhile, from a long-term fundamental perspective, we continue to believe investors with long time horizons are better served by owning more stocks than other asset classes, despite the numerous headwinds facing the economy. Cash/money market funds continues to pay zero yield; 10-year treasuries (fixed income) pay just 3.3% and rising rates at some point will push prices down; while US stocks offer a dividend yield currently at 2% and capital appreciation potential.

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Not All About Employment... But Close - Week Ended 6/4/10

posted 06.07.2010 at 10:27 a.m. by steve

Despite a holiday-shortened trading week due to the Memorial Day holiday for US markets on Monday, the week again felt long for investors as stocks finished down -2.25% on the S&P 500. Throughout the week, markets seemed to be moving past the recent turmoil and cautious optimism was present heading into the employment report Friday. Comments from President Obama Wednesday afternoon alluded to strong job growth and helped produce one of the biggest daily gains of 2010. And, Thursday continued the prior day advance, helping to cement the first two consecutive daily advances for the S&P 500 in over a month! but, the much anticipated employment report on Friday came and went falling dramatically short expectations. Outside of temporary Census hiring, the private sector added just 41,000 jobs during the month of May; that figure was well short of economist expectations for 150,000 to 250,000 new jobs ex-Census. Add to the disappointment news from the country of Hungary, who essentially said that it is likely headed for a Greek-style debt crisis, and it was not surprising to see the markets give back all of the recent gains plus some (losing nearly -3.5% on Friday).

Despite the week finishing on such a negative tone, not all news was bad. Instead, the recent data remains more consistent with a soft-patch in the economic recovery, or a bump in the road as opposed to a double-dip recession. Of key importance last week was that credit spreads and Libor rates (a gauge of counterparty trust between banks) held steady, curbing their recent trend of deterioration. While the Labor Department report on Friday was less than inspiring, other job-related data was more encouraging. Some leading indicators of employment continue to point toward additional hiring in the months ahead. Given recent events, from European debt issues to oil spills to terrorist actions, we suspect volatility will continue and the markets will struggle to find direction. Add to those events a relatively light week of economic news, and expect that investors will be reading closely any data that helps further understanding on the direction of employment, consumer sentiment and international economic activity. Key among the releases will be the international trade data due on Thursday and retail sales on Friday. Overreactions to good or bad news in the short term are likely as investor emotion and fear is back.

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Worst May on Dow Since 1940 - Week Ended 5/28/10

posted 06.01.2010 at 3:54 p.m. by steve

Sell in May and go away so the old saying goes; it is probably one which many investors wish they had followed this year. Despite the strong performance of Thursday, and a week that was overall flat, the Dow finished May with its worst percentage loss since 1940. The index lost -7.92% for the month with others down a similar degree and moves the market officially into correction mode defined as a decline of more than 10%. Since April 23, the market has generally been sliding downward, with the S&P failing to have experienced two consecutive days of positive performance since that time. Ultimately, global economic and financial worries were the root of the problems for financial markets during the month. European debt, financial regulation and diplomatic tensions combined during the month, proving to be a toxic brew for both equity and credit markets. Indeed, the credit markets have been showing some early signs of stress; we need to see this abate. Fear of contagion has likely caused the slide in stock prices to become overblown, but it does seem that the economic conditions and facts are changing.

It is worth acknowledging the economy remains in an improving trend, but a soft patch does seem to be upon us as the most current measures of consumer confidence and spending have slowed the pace of their recovery. Economic data has lost some of its exciting tone in recent weeks. Much of that is likely attributable to the stock market and its recent slide, leaving people feeling shaky. Still, we believe that stronger corporate earnings (profits) and new hiring will continue to feed upon themselves and continue the positive feedback loop that seems to be developing. One of the biggest reasons why we feel the current market has more room to run is that the stock market recovery still trails by a wide margin the recovery that has been experienced for real GDP (key measure of economic activity). In terms of economic productivity, the US economy has largely recovered most of what it lost from 4Q 2007 to early 2009; meanwhile the S&P remains almost 30% below its October 2007 peak.

Corrections like the one currently being experienced are never fun. However, history does provide context for what investors might expect. For instance, in 1932, following an +86% run there was a correction of -30% before the market resumed its upward trajectory and rose another +102%. Investors are likely to feel very skittish following one of the worst bear markets in history, but there are many reasons to try and remain optimistic. Stay tuned for our monthly commentary later this week as we will provide additional perspective.

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