Stock Market Awaiting Economic Signals and Follow-Through

By: Paul_J_Nolte

Taking a cue from my old DJ days, this past week could be summed in a couple of tracks from some scratchy wax – Give The People What They Want and More, More, More. The Fed has cut rates by 125 basis points with the most recent 50bp cut in less than 10 days – and once done, the markets were wondering if there would be another 50bp cut before their next meeting at the end of March. It took the Fed a full month in Jan 2001 to cut rates by 150bp – in the midst of the beginning phase of a recession.

Today's economy may not be as weak, depending upon the economic series one prefers to view. The corporate side remains relatively strong – durable goods orders are higher and inside the otherwise poor GDP report, the business side looked to be in decent shape. However, the consumer is another issue, with spending down, confidence lower and still having “issues” with housing and slowing employment. With the consumer comprising 60-70% of the economy, it pays to watch what the consumer is doing (not just saying). Our expectation is the consumer will drive this recession, even though corporation should do OK, based in part on still strong foreign economies. While a nice gesture, the “rebate” proposed won't help consumers repair their stretched balance sheets only “Time in a Bottle” will likely make it work.

One week later, here we are at the very resistance levels we outlined last week – much as the markets crashed through various support levels on the way down, they are putting on a great show on the way back. Expecting that the fiscal and monetary stimulus will save the economy, stocks rallied putting in their best week since the bottom back in 2003. The good news is the short-term picture has certainly brightened, as volume has been expanding with the rallies and contracting (a bit) on the declines. The advance – decline lines are looking better, meaning better participation in the rallies.

While still not out of the woods, the action of the past two weeks has been encouraging. If the markets can clear some prior peaks or if the market internals could do the same, we would be much more excited about stocks. For now, this rally has the look of prior rallies since July ‘07; each rally higher has been short of prior peaks forming a stair-step lower. The market needs to begin building stairs that go up, instead of down, to provide a better long-term picture. For now, we await better signals and additional follow through to the recent burst higher. If it fails, then we could see the recent gains all erased.

Is the Fed running out of bullets? The question has been asked around Wall Street as investors watch the persistently poor economic data parade across the daily papers. From losing jobs to poor wage growth and longer “wait” times between jobs, it is hard for the consumer to believe prosperity is right around the corner. As a result of the rate cuts, both short and long-term rates are approaching lifetime lows – and the question persists: how low can they go? With normal 9-12 month lags, the cuts of the past two weeks won't be felt in the economy until 4th quarter, so much of the data being released won't be affected by these cuts. Surprisingly, our models still point to even lower rates ahead. 

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.

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