Anxiety Grows and Recovery Slows
Though the market has continued to rise in recent weeks amid bad news, its pace has indeed slowed and it appears to be entering a holding pattern.
This week consumer confidence numbers fell, presumably due to rising inflation expectations. Food prices, the subject of many recent headlines, have continued to increase, while GDP growth has begun to slow. The housing market, after staging a noted recovery after the real estate market crash in 2007-08, has leveled off as inventory remains high. Housing prices have even fallen in some markets.
We've written before and we maintain that presently inflation fears appear unjustified. Though prices are rising, money supply growth hasn't been outpacing GDP. In fact, money supply hasn't even been growing. Unfortunately that's beside the point.
It seems that the market's recovery since the 2008 crash may be petering as the flow of good news on the economy has stopped flowing. The biggest issue remains above-average unemployment; and though personal incomes are up, the rise hasn't been sufficient to encourage investors.
This confluence of factors has, unfortunately, led to what is beginning to look like a stall in the recoveries of the US economy and financial markets.
There's an old saying in finance that "markets don't react to the same news twice." Right now, that's exactly where we find ourselves. Over the past two years the picture has brightened for the US economy as business has stabilized, and the market has rallied on that optimism. Now the news has stopped improving and the market has stalled.
The question we're now asking ourselves is whether this recovery has run as far as it can without jobs.
The economy has come quite a ways in two years, but admittedly the one aspect that has been lacking is in employment. After the 2008 crash that had led many to tighten their purse strings, most consumers began treating themselves. Holiday spending brightened, purchases that had been delayed were finally made; and this drove much of the post-crash recovery.
Now, with the number of discouraged workers continuing to rise and the unemployment number failing to make substantial improvement, much of this consumer spending has dissipated. Thankfully we've seemed to have stopped shedding jobs and even seen a slight uptick in private sector employment, but the job market simply hasn't kept a pace necessary to fuel further economic growth.
Keep in mind that these developments have nothing to do with Japan or the Middle East. Just as we projected the day of the earthquake in Japan: neither the events of that day or the continuing fallout have had lasting impacts on the market. Though the markets did experience initial shock, they quickly rallied to their previous levels.
The phrase we used at the time was that "events don't shape markets, they shock markets;" which we believe continues to hold true. The markets now are not being shaped by events in the Middle East or the Far East, but by developing economic circumstances right here in the US.
Before the markets can continue higher, we need to see NEW good news on the economy. Most importantly, we need to see further recovery in employment, which has been extremely mild so far. There are still plenty of investors sitting on the sidelines - many more bulls in the making. What they need, though, is something to drive optimism and keep the recovery rolling.