The cover of Barron’s this week says, Outlook: Mostly Sunny. Their Big Money poll shows 55% of the professional money managers they surveyed are bullish on the stock market. If that makes you feel similarly optimistic about the near term outlook for shares, it might interest you to know that 59% of these perennially pollyannish souls were bullish at the same time last year just prior to a 20% correction. Finding bulls on Wall Street is about as difficult as finding nuns in a convent. Curiously, only 46% of those polled believe the stock market to be undervalued so at least some of these money managers are working off the greater fool theory of market forecasting. With 84% of those polled expecting to be buyers of stocks in the next 6 to 12 months the supply of fools doesn’t look to run out any time soon so maybe these purveyors of doublethink will turn out to be right.
I, on the other hand, just returned from a trip to Seattle and while that city holds many charms, a surfeit of sunshine isn’t one of them. The weather during my short stay in the Emerald City is a great metaphor for the economy and stock market, marked as it was by short bursts of sunshine through the generally prevailing gloom. The economy since the end of the great recession has produced brief bursts of better than expected activity but something always seems to come along to dampen the mood. The last two years have seen the stock market peak, along with economic activity, in the spring and this year so far looks no different. The sunny economic statistics turned overcast in mid-February and the stock advance stalled about the same time.
Christine Lagarde, the head of the IMF, said last week that there are dark clouds on the horizon for the global economy and used that as a pretext to raise an additional $400 billion for the fund. I have no doubt she’ll find plenty of uses for it in the coming months with Spain at the head of the line. The appetite for austerity is waning rapidly in Europe as evidenced not only by the results of the French election today but also the failure of the Netherlands to agree to budget constraints. The French election will need a runoff between Sarkozy and Hollande but the betting money is on the socialist Hollande who is proposing a renegotiation of the fiscal pact agreed to last year. He is pressing for higher taxes and more government “stimulus” as well as direct lending to countries by the ECB. In other words, more of what got Europe in this mess coupled with inflation to pay the tab.
That is pretty much the opposite of what needs to happen in Europe. Cutting government spending – so called austerity – is the proper response but it needs to be accompanied by tax cuts and deregulation, especially of labor markets. A similar program in the US would pay dividends as well although neither President Obama nor Mitt Romney appear to be offering such a bold approach. President Obama’s economic platform looks suspiciously similar to Mr. Hollande’s and Romney’s plan, such as it is, just rearranges the deck chairs on the Titanic. What the European and American economies both need is a healthy dose of creative destruction. The high profit margins of US and European multinationals are evidence – at least in my mind – of a lack of competition produced by the statist capitalism that prevails in both regions. Unfortunately, Obama and Romney represent a choice only between two sides of the same coin of cronyism.
As I said above, the economic stats here in the US turned overcast in mid-February and last week’s numbers did nothing to change that trend. With the exception of a better than expected retail sales report – something I don’t see as sustainable – the reports were almost uniformly less than expected. Stocks did manage to gain slightly – the S&P 500 was up 0.6% – but it isn’t a good sign to me that they weren’t able to advance more with earnings reports that were generally better than expected. 80% of reports so far have beaten expectations but the bar has been lowered considerably as Wall Street analysts have been cutting estimates since late last year. In any case, the meat of the earnings season is next week, so hold the celebrations until we’ve got a bigger sample. Apple reports Monday in what should be a very interesting week.
Manufacturing has been the bright spot in the recovery but the surveys last week from the NY and Philly Fed’s were both less than expected while still showing growth. Both reports showed new orders in the low single digits – still growing but slower – but also showed rising expectations for hiring growth. That isn’t necessarily good news if orders don’t pick up as it would likely pressure margins. It is also contradictory with the new jobless claims report last week which showed another rise to 386k. Claims have been creeping higher the last few weeks and that isn’t good news for the economy or the stock market. Industrial production, in contrast to the Fed manufacturing surveys, was flat in March.
Retail sales were much higher than expected, up 0.8% but at least part of the gain is nothing but inflation. Gas prices rose and while the dollar volume of auto sales was higher, the unit volume actually fell by a sizable amount. The timing of Easter may have had something to do with it as well as both the Goldman and Redbook reports showed big drops last week.
Housing starts fell 5.8% in March but are 10% higher than last year. Permits also showed some optimism among builders, up 4.5% to an annualized rate of 747k. Existing home sales were also down, 2.6% lower in March versus February. Supply remained steady at 6.3 months. Mortgage applications for purchase were down 11.2% on the week. Housing is still the missing piece of the recovery.
The global economy inspires little confidence at present and we remain conservatively invested with a slightly bearish bias. The US economy doesn’t appear to be falling off a cliff but there seems little doubt that activity has slowed as the year has advanced. The threats to growth from the continuing debt crisis in Europe and the unknown extent of the Chinese slowdown are uncertainties that look to continue. For now, I am content to hold a higher than normal level of cash as an option with the expectation of better buying opportunities in the future.
For information on Alhambra Investment Partners' money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@alhambrapartners.com or 786-249-3773.
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