Almost half way through the year..What’s next for the markets?
After the sustained selloff in previous trading sessions, the markets rallied Friday to claim a strong gain for the week. The S&P and Dow both booked a 0.8% gain, while the Nasdaq rose 1.0%.[i] With the choppy market performance and gloomy economic sentiment we’ve seen in the past weeks, we wanted to spend some time discussing recent trends and what they might mean for the future.
In short, many of the problems that plagued the markets in 2010 and 2011 - a serious European debt crisis and recession, a slowing Chinese economy, slow domestic growth, and the looming expiration of Bush-era tax cuts - are still with us in 2012. The uncertainty around these issues has dealt investor sentiment a major blow and spurred an exodus from equities into bonds and other "safe haven" investments, pushing Treasury yields to record lows similar to levels seen in the 2008 crisis. There’s a real current of fear underlying these moves that the global economy is slipping back into recession. Whether this fear is realized depends largely on how the credit crisis in Europe develops. Things may be looking up (at least temporarily) as Eurozone leaders have pledged to lend Spain up to 100 billion euros (approx. $125 billion) to recapitalize its banks, pending an audit this month. By pumping more liquidity into the economy, policymakers have bought themselves a bit more time to find a solution.[ii] We hope that markets will react positively to the news this week.
Domestically, many people are worrying about whether 2012 will be a repeat of the last two years, where an initially promising start fizzled out in the spring. Economic data has been patchy at best, and employment growth seems to have lost steam over the past few months, with not nearly enough jobs created to sustain continued growth. At this point, we can't be sure if this is just a temporary slowdown or a sign of continued economic contraction. Based on a number of factors, we currently suspect that this is a temporary, cyclical slowdown and that job growth will pick up in the latter half of the year. Supporting this belief, the Fed’s most recent Beige Book report stated that U.S. economic growth picked up over the last two months, and hiring showed signs of a "modest increase," indicating that the situation is not as grim as many originally feared.[iii]
With respect to equity markets, we know that historically, the market suffers one 10% (or greater) market correction each year. The S&P briefly touched an intraday correction of 10%, so does that mean we can expect solid growth going forward? It’s impossible to know for sure, but it’s rare to see the kind of persistent selling pressure that we’ve seen for the last month, where, for example, the Dow experienced 17 losses in 22 trading sessions. This lingering weakness has resulted in very pessimistic investor sentiment that may set markets up for a positive rebound. Additionally, we’re also under the effect of typical Presidential Election year trends, which historically have called for a peak in April and a decline on June, a script the markets have followed closely this year. If the cyclical trend continues, we can expect a new burst of energy in the second half of the year.
HEADLINES:
Wholesale businesses restocked faster in April, indicating strong sales could push economic growth higher in the second quarter. The Commerce Department report says wholesale stock grew by 0.6% in April, nearly double the March growth. Wholesale sales grew by 1.1% in April, almost triple March sales growth.[iv]
Chinese exports jumped 15.3% in May from May 2011, compared to April’s 4.9% growth. Imports also increased 12.1% compared with March’s insipid 0.3%. Although the positive numbers may ease fears that China’s economy is slowing, the Chinese government will likely take further measures to boost their economy.[v]
Fed survey found that U.S. economy grew moderately in most regions of the country this spring. The report shows growth in each of its 12 bank districts from April 3 through May 25, indicating that despite a poor jobs showing, the economy is still chugging along.[vi]
Unemployment claims dropped by 12,000, according to the latest Labor Department report. Although a one week decline does not indicate a trend, a recent Labor Department report indicates that worker productivity is low, meaning employers will have to hire again if business picks up.[vii]
QUOTE OF THE WEEK:
“The only thing we have to fear is fear itself.” - Franklin D. Roosevelt,
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