Do or Die for Stocks
Stock-Markets / US Stock Markets Jul 13, 2009 - 04:01 PM GMTSlowly and step by step, the markets have eliminated the gains since May first. Sell in May and go away indeed! With little in the way of “juicy” economic data, the markets fretted about the rumors of another stimulus bill (another cup of coffee for that morning jolt?) that may be indicative of a still weak economy.
Judging by the recent economic releases, the consumer is only interested in more money to pay down debt or save – not to spend. Our view has been that this deleveraging process is likely to take a few years, not quarters, which will result in below “normal” economic growth that in turn keeps a lid on earnings growth. All of this spells trouble for stocks. This week begins the earnings season in earnest and the focus will not be necessarily on earnings, but sales and sales growth as well as corporate comments about the economic environment. Rounding out the week will be likely another lousy housing starts number. Further correction in stocks or a rebound should be answered by next weekend.
The slow slide by stocks, combined with the very low volume is making it tough to discern whether the decline is from lack of interest or really a “silent” beginning of something more. Not only is the SP500 right on the cusp of long-term averages, but too are other major markets like foreign and small US stocks. We are beginning to see an across the board decline, without the benefit of major asset classes (save for bonds) outperforming. This convergence of performance was experienced in the fall. Mathematically speaking, the correlations between asset classes are rising, meaning spreading money around does not improve performance. In these situations, it is best to call it a day and hold tight in short-term bonds or cash. While they yield very little (never mind after tax!), it does allow investors to fight another day. As mentioned above, this week is likely to be a do/die week for stocks and we will act accordingly.
The decline in utility stocks was offset by the large drop in commodities, which keeps the model projecting still lower rates. The huge decline in bond yields over the past five weeks may temporarily run out of steam, if only to rest a bit before embarking upon still lower rates ahead. The auctioning of bonds by the government has been met with better than expected demand. If the equity markets continue their slide, we could see a “flight to quality” trade similar to that in the fourth quarter, pushing long bond yields below 3% (now just over 4%). As a result of the large decline in bond yields, we are not as aggressive in pushing out maturities as we were last month. Also being reported this week will be inflation figures, likely to show a big jump due to the previous rise in oil prices that has since subsided.
By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com
Copyright © 2009 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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