Financial Market UpdateStrategicPoint of View®
March 15, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
Markets drifted up on little news. Financials outperformed, as fears of tight regulation dissipated, leading to the belief that Congress is less likely to monitor or limit bank institutions’ risk taking. Investors focused on consumers at the end of the week, when retail sales came in better than expected but consumer confidence faded.
S&P 500: 1150 (up 1.05% for the week and up 3.14% on the year)
Dow: 10,625 (up 0.56% for the week and up 1.89% on the year)
NASDAQ: 2368 (up 1.81% for the week and up 4.36% on the year)
10-year: 3.71% (from 3.68% last week)
Crude Oil (April): $81.24 (from $81.18 last week)
Gold (April): $1,107 (from $1,135 last week)
USD/Euro: $1.3768 (from $1.3623 last week)
THIS WEEK
The week ahead will be a busy one. Reports scheduled for release include: Consumer Price Index, Producer Price Index, industrial production, housing starts, jobless claims and leading economic indicators.
COMMENTARY
So, who is going to lead us out of the recession, anyway? Let’s answer that officially and unofficially.
Officially means using defined metrics to produce economic data based on carefully controlled surveys and measurements. Unofficial refers to conversations with clients, anecdotal experiences and general reading that can’t be called true science, but does require a dose of educated, artful analysis for interpretation. We use both. Economic analysis to support our investment and policy decisions; educated analysis to take the pulse of the local economy, and, more importantly, to help our clients plan for their futures.
Official: consumer spending constitutes 70% of our economic growth. Throughout the 1950’s, 60’s and 70’s, and much of the 80’s personal consumption was closer to 62% of GDP. For the last two decades, the number has crept up until 2008 when spending hit a high of 70.1%. (Brookings Institution)
Unofficial: many people – at least until very recently - indulged their spending appetite for much of the past fifteen years. No one spent “extravagantly” by their own admission, but extravagance came increasingly to apply only to the ultra rich. Spending became a habit. Any sense of urgency about spending restraints was often lacking, even when the line of credit was maxed out.
Official: during recoveries immediately following the last seven recessions, consumer spending accounted for only 55% of GDP (growth). (JPMorgan Chase)
Official: retail sales for the month of February rose 0.3%, in sharp contrast to the expected decline by most economists. Year over year, sales have grown 4%. (Commerce Department)
Unofficial: Clients say they are pulling back on spending – eating out less, buying fewer clothes, traveling closer to home. But, they are spending. Little indulgences are becoming more important, as fears about the future ease. If we look around town: compared to a year ago, restaurant reservations are harder to get on Saturday nights, shoppers seem to be carrying more bags at the malls and kids are still benefiting from special camps, lessons and schools. Add to cautious spending, additional savings and we see a consumer who is gradually adjusting to the New Normal.
Official: Replenishment of business inventories constitutes 28.6% of growth in a recovery. (JP Morgan Chase) This past week inventories were flat, not furthering the case for recovery.
Unofficial: Anecdotal evidence provides perhaps one explanation for inventory sluggishness. Some companies, which had put production on hold in 2009, are finding it hard to ramp up rapidly. To meet any new demand, these companies have to purchase supplies from other companies that also scaled back during the crisis. Demand alone is not enough to propel the economy forward; building the economy will take time.
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Let’s put all of this into context. The economy has been hit by both a business cycle downturn (earnings bust following an economic boom) and a credit cycle (lack of liquidity resulting from too much debt and need for de-leveraging). A credit cycle is often longer than a business cycle and can be the catalyst for making the business cycle deeper and the recovery protracted. This was true in 2008 when both cycles collided to create a severe recession, and now in 2010, as production is hampered by lack of funding, keeping the recovery modest.
But the recovery is moving forward, in spite of continued credit problems. We see this in the scientifically produced economic data and in the anecdotal conversations we have with clients. For the most part, the tone of our client meetings is different and more positive this year than last year, and for that we are very thankful.
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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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