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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