I’m hoping to put some more substantial thoughts into an update soon, but have been bogged down by this earnings season. So, here’s a real quick summary of our current thinking on recent new data points.
1.) The market has continued to move higher. If the current rally, up just shy of 30%, proves to be of a bear market variety rather than the beginning of a new bull market, it would qualify as the fourth largest bear market rally since 1900. The other three larger bear market gains all came in the 1930’s, lasting about 100 days and gaining between 35-60%. Every other rally proved immeasurable since it marked the beginning of a new bull market.
2.) If you want to measure this rally from the November lows, then we’re over 100 days into the current one, a tad longer than Obama’s time in office and coinciding with his election. However, to be fair, ten percent lower lows were hit in early March, so this date may represent a better measure of duration. (I believe the new March lows were hit due to an overly ambitious political agenda and budget from the new administration. Having put a number of issues on the back burner, let’s hope Obama is a quick learner like Clinton proved to be. So far, I am encouraged.)
3.) Technically speaking, the markets have acted great through earnings season and are now resting at minor resistance levels in the 875 area on the S&P 500. Q1 GDP came in worse than headline expectations this morning, showing an economy that contracted about 6%. With all the “less bad” talk lately, many had hoped for something in the high 4’s. The markets seem to be shrugging off this seemingly negative data point today, however. GDP growth was negatively impacted by a 3% reduction in inventories and a surprisingly large 3.9% reduction in government spending. While time will tell if the 3% reduction in inventories is repeatable, the decline in government spending should appear suspicious to anyone reading the newspapers in the last six months.
4.) April consumer confidence ticked up to 39 from 26 and a consensus read of 30. Granted this number is still very low, but it is much better than it was. This has also been the first earnings season since the third quarter of 2007 that S&P estimate revisions have been positive relative to the beginning of the quarter. Again, the read is only slightly positive, but like many things, it represents a change. It is worthwhile noting that after this reading first tuned negative in the fourth quarter of 2007, it only took a few short months for the stock market to start its string of uninterrupted and brutal negative performance quarters. Reversion to the mean?
5.) As this rally continues to move forward, we should expect new leadership groups to emerge. So far, while many areas have done well, the market’s rally has largely been powered by consumer discretionary, technology, and to a lesser and more questionable extent, financials. If this is not a bear market rally, then we will most likely see a pickup in the performance of later stage cyclicals. From our reading of earnings transcripts, better or less bad results have been confirmed by the tone of management teams from consumer discretionary, technology and financial shares, but not those of later stage cyclical groups. Management team comments from these groups were still pretty dour, with a less of an end in sight mentality. Nevertheless, if you’re in recovery mode, as we prefer to be, then the are groups worth exploring.
6.) An article in today’s Wall Street Journal seems to declare the death of “buy and hold” investing and a preference for tactical asset allocation and trading. Contrarians take note! Talk of premature deaths and attitudes of “this time it’s different” often seem to mark interesting turning points in the performance of various industry groups, stock market indices and performance styles.
Wow, so that was a little more than I intended, but perhaps it will catch you up on our interpretation of the recent news and events. I’ll have more cogent thoughts and elaboration for an Economic Update shortly.