Stock Markets Marking Time Ahead of Real State of US Economy

By: Paul_J_Nolte

The calendar turns another page and we dive headlong into summer with the hope/expectation that the government checks that have hit our accounts over the past few weeks will save us from the deep end of the debt pool. The reports last week provided little comfort that the economy is improving, as spending and income merely matched inflation – and the income number does include the rebate “income”. So for another month, the consumer is spending what they have and trying to keep pace with an ever-faster treadmill. Housing still looked poor, with the Case-Shiller index still showing lower housing prices. Little surprise that the consumer is feeling blue, with confidence at the lowest level in nearly 16 years.

But with a new month comes a raft of economic data, including the biggie – employment. Payroll growth has been averaging roughly 40,000 per month over the past year, well below the peak levels of two years ago of over 200,000. Of the eight times payroll growth slowed, seven saw an average monthly loss of over 100,000 before turning higher, with late 1970 the only exception – payrolls declined an average of 50,000 per month. This report could signal just how deep “into it” we really are!

Very quietly, the markets continue to rise, this week boosted by the flagging oil market – which gave up a few dollars per barrel. Hardly an inspiring rally given the huge decline in oil prices, but a four-day rally is nothing to sneeze at. However, we can always complain about the lack of effort. The net number of stocks rising versus falling has not surpassed the early Dec '07 high and is still lower than the figure just two weeks ago. Total volume remains poor, and the total advancing vs. declining volume of the past month is nearly dead even – hardly inspiring. As the markets bounce around, the number of stocks making new highs versus new lows has also shrunk, again providing both the bullish and bearish camp with supporting evidence.

The markets seem to be marking time, awaiting either confirmation that the economy is in the drink (and in need of additional stimulus – and markets decline) or we just had a mild recession and have already put the worst behind us (and rates rise – markets fall). Many of our indicators are in no-man's land and easily could go either way. Our betting is that over the next few months, the markets are lower than today – but next week is a toss-up.

Even with lower commodity prices, the bond market fell on the week as investors are beginning to build in a likely Fed hike during the fourth quarter. As unlikely as it sounds today (with the still poor economic data), many believe that the financial crisis has passed and the economy has weathered yet another storm.

Our model continues to be tilted negatively, indicating that rates will continue to rise in the weeks ahead, as it has correctly indicated over the past six weeks. If the economy really is on the ropes, we should be getting a signal from the model over the next few weeks. A continued decline of only a few percentage points will provide a bit of a boost to the model, but bond prices will need to rally as commodities fall in order to put the model back into “buy” mode. 

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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