U.S. Economy Recovery, Is This as Good as It’s Going to Get?

By: Sy_Harding

It’s a major question for investors. Is this as good as it’s going to get? Has the economy peaked in its recovery for now? Has the stock market begun a significant correction to factor in a slower economy, or even a dip back into recession later this year?

In this column two weeks ago I predicted that after several months of little to no volatility the market was about to undergo a significant testing.

The very next week the U.S. market first reached a new high, and then the next day began what turned out to be a scary plunge of more than 5% in three days, accompanied by similar declines in global markets. The catalysts were moves by the Chinese government to cool off its economy in an effort to ward off threatening inflation; earnings reports from major U.S. banks showing big profits from investment activity, while their loan losses continue to rise; a proposal from the Administration to ban major banks from many of the investment activities that have been producing their profits (and supporting the stock market).

From a market technician view, the decline halted just about on the potential support at the 20-week moving averages of the major indexes. The 20-week moving averages provided important support for the previous ‘pullbacks’ that have taken place in this bull market, the market rallying off the support into new up-legs each time.

The U.S. market struggled this week to try to make that happen again, and seemed to be  doing so, especially in the morning on Friday when the market rallied strongly in response to the better than expected GDP report for the fourth quarter.

But it couldn’t hold the gains, selling came in later in the day and closed the market down for the day and the week. The Dow closed down only 1% for the week. But the Nasdaq closed down 2.7%, as the bottom dropped out of the tech sector. In the process the major indexes did break below their 20-week moving averages, not a good sign. And also not encouraging, global markets made no effort to end their ‘pullbacks’, plunging sharply again this week.

Economic reports this week did little to raise investor confidence that it will only be another 5% pullback, another buying opportunity as the economy continues its recovery.

For instance, after several months of improving numbers in the housing industry it was reported this week that existing home sales plunged 16.7% in December, the biggest monthly decline in 40 years, new home sales unexpectedly fell 7.6%, durable goods orders rose only 0.3% versus forecasts that they’d be up 1.7%, while new unemployment claims fell last week by only 8,000 versus forecasts that they’d decline by 28,000.

Background noises from the World Economic Council’s annual meeting in Davos, Switzerland, did not help. They included predictions that the U.S. and Europe will see their economic recoveries stall later this year, while continuing global recovery will depend on China and India’s ability to keep their fast growing economies on track.

The market did get a positive surprise from Friday’s report that the economy (GDP) grew 5.7% in the December quarter, considerably better than the consensus forecast of 5.4%. It was the fastest growth since the third quarter of 2003 (when the 2002-2007 bull market was in its early to middle stages). Coming after the 2.2% increase in GDP in the third quarter, which indicated the recession had ended, the fourth quarter number could have been taken by a confident market as indication that good times are well on the way.

But it didn’t happen. After an initial rally on Friday in response to the report, which had the Dow up triple-digits, the market returned to wallowing in uncertainty, up only fractionally, and then sold off sharply in the final two hours to close down for the day, and for the week.

Investors in a number of companies that reported big earnings increases for the fourth quarter seemed to decide it is as good as it’s going to get, judging by the heavy selling in stocks like Apple,  Microsoft, and other leading tech stocks, which took the bottom out from under the tech sector.

So the expected significant testing of the market is underway, and is not looking good.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

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