I am not surprised that the market churned sideways this past week. Fund managers were just running out the clock on the first quarter. Investors were reluctant to make any big bets ahead of the jobs report on Friday. Plus, we had a ton of economic data to digest.
Overall the manufacturing data last week was bullish. It wasn't just the U.S. but around the world and it reinforces the hope that the economy is finally on the road to recovery. However, bears would argue that this economic rebound has already been priced into the stock market and that stocks are actually ahead of themselves. I want to warn you that the double-dip recession is still a threat.
Months ago I warned readers that we would see a super strong fourth-quarter following by slower growth in the first and second quarters of 2010. It is the second half of 2010 and early 2011 that looks questionable and we start to worry about the economic recovery fizzling out. I also warned readers that it would be hard to maintain your focus on the bigger picture while everyone cheers the bullish economic headlines during the first half of 2010.
It is true that the economic data this past week was positive. We have finally hit the inventory replenishment phase that we have been expecting for over one year. How long this burst of manufacturing will last is the real question. Businesses remain very cautious. Many of the biggest companies in America have been warning about the millions of dollars in new expenses it will cost them to conform to the new healthcare rules.
Ask yourself this question, if you're a business owner or a high-level executive in charge of hiring, how many new workers are you going to hire when you have millions in new healthcare expenses you have to sort through or worse yet you just don't know what it's going to cost you. I bet this will keep hiring to a minimum while the new rules and procedures get sorted out. The only one hiring will be the IRS who needs thousands of new agents to help collect new taxes.
Furthermore I want to remind you that the housing market is not making a comeback. We have seen eight months of fractional improvement in the Case-Shiller numbers but these are a seasonally adjusted three-month average. Sales have stalled and they're going to get worse. Two weeks ago a White House advisor said that they expect between 10 to 12 million new foreclosures over the next three years. I could not believe my eyes. That is double the more common estimate of five to six million foreclosures over the next three years, which was already an outrageous number. A tidal wave of foreclosures is going to swamp any housing recovery, which will keep consumers on the cautious side and thus encumber any economic rebound.
Technically the market's trend is still up. If you look at the S&P 500 the index actually looks poised to rally higher after two weeks of consolidating sideways. However, we have not yet seen the market's reaction to the jobs report on Friday, April 2nd. The jobs data was a disappointment. Prior to the report official estimates were in the 180,000 to 190,000 new jobs for the month of March. Whispers numbers were in the +300,000 range. The Labor Department said the country only added +162,000 jobs and that was with 48,000 new temporary census workers. Granted it is job growth and it's the best growth we've seen in three years but it's still a disappointment.
The jobs report could be the catalyst we need to finally spark a market sell-off. Don't get me wrong. My market bias is bullish over the next few months but short-term, over the next few weeks, I'd love to see a 5% correction, which would bring the S&P 500 index into the 38.2% to 50% Fibonacci retracement levels of its February to April rally. Of course you could take the opposite view and argue that the weak jobs number will keep the Federal Reserve on the sidelines and eliminate any pressure for them to raise rates but then they have been saying they wouldn't raise rates for a while anyway. Would the weaker jobs number really be a reason to buy stocks?
In summary, the manufacturing data has been bullish. The job market and real estate market remain fragile. Stocks are still overbought and overdue for a pull back. Wait for the market to correct before considering new long-term positions. Sometimes the best trade is no trade.
Chart of the S&P 500 Index:
Chart of the Russell 2000 Index:
LONGER TERM OUTLOOK
Previous Comments on my Long-Term Outlook:
My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.
~ James Brown