The U.S. economy may be experiencing a "V-shaped" economic rebound.
But it's not the conventional V-shaped rebound – where the two sides are about even. We may actually be looking at an extended rebound in which the right (recovery) side of the "V" extends way up high, like a checkmark.
Since that is way out of the consensus view – and seems impossible – it is something that you must consider as a real possibility. The great performance of corporate bonds this year is sending the same message.
What's the bottom line: All the talk about a slow, muddle-through economy in 2010 to 2011 may be rubbish.
Clearly, all the talk about a "double-dip recession" is likely off the table.
Let's take a look at exactly what's happening.
Stocks jumped over the finish line with flair on Friday, concluding the first weekly gain for the U.S. market since the start of September.
It was a relatively quiet trading session, as the news flow was dominated by word that U.S. President Barack Obama was awarded the Nobel Peace Prize. Stocks hesitated mid-session at the top end of the September trading range after U.S. Federal Reserve Chief Ben S. Bernanke said that central bank support for the economy wouldn't last indefinitely, but last-minute buying pushed securities higher.
In the end, the Dow Jones Industrial Average gained 0.8%, the Standard & Poor's 500 Index rose 0.6%, the Nasdaq Composite Index rose 0.7%, and the Russell 2000 rose 1.2%. For the week, the S&P 500 was up 4.5% – its best five-day performance since mid-July.
Financial and technology stocks led – though defensive groups such as utilities, health care and consumer staples also advanced smartly. Laggards were the groups that had advanced the most the previous few sessions: energy, materials and large emerging markets.
Volume was light, with just 990 million shares trading on the New York Stock Exchange. Over the past summer, there were only a few sessions that posted fewer transactions. Maybe we should blame the Canadians: Traders up north may have snuck out of town early to begin their three-day Thanksgiving holiday.
That brings us to the evidence for the "checkmark" pattern, V-shaped economic resurgence.
Let's call it the "Great Recovery."
The Great Recovery
What's the best way to follow a Great Recession?
How about with a Great Recovery …
According to the latest data from the Economic Cycle Research Institute, the economy is poised for its strongest recovery in more than 30 years. The monthly growth rate of its Weekly Leading Index is now sitting at a level that has not been witnessed in at least four decades.
As most of you know, the ECRI weekly leading index is the only gauge of the economy that I have found to have real usefulness as a forecasting tool. Unlike the linear measures that most indexes use, it uses non-parametric measures to look around the corner and figure out what's coming.
It was early in calling the recession two years ago, and caught a lot of heat; and it was early in calling the recovery early this year, and has caught a lot of heat.
ECRI chief Lakshman Achuthan told Reuters that with the WLI at new record highs, "the economic recovery will prove to be far more resilient in coming months than most believe possible."
This evidence fits well into the envelope of views that I have expressed here repeatedly over the past few months: The path to recovery will be bumpy, with painful problems like stalled employment growth causing a lot of doubts and fears. But with governments and central banks pouring money into the global economy in unprecedented amounts via fiscal stimulus and low interest rates, we have a high level of conviction that the recovery is unstoppable, and that equities will continue to plow forward in anticipation of the fundamental improvements becoming more visible later.
Favorite positions to take advantage are still exchange-traded funds (ETFs) with heavy overseas and economic exposure. Right now that includes iShares Global Financial Sector Exchange Traded Fund (NYSE: IXG) and iShares Metals & Mining (NYSE: XME); on dips it includes iShares Emerging Markets (NYSE: EEM) and Vanguard FTSE World Ex-USA Small Cap (VFWIX). And after a brief period of underperformance, tech stocks might be ready to roll again, especially hardware like SPDR Semiconductors (NYSE: XSD).
Bears Still on the Prowl
But don't get complacent – not now, not ever – because bears are still on the prowl. They still think they are going to win, and they are just looking for the right time to attack again – when bulls are vulnerable. I know this because I hear from them all day long.
Their main argument (from a fundamental perspective) continues to be that weak employment figures will undermine consumer buying during the holidays; consumers are saving more and spending less, and can't get bank loans; and companies are deleveraging. And then from a technical perspective, bears also harp on the lack of volume in this up move. But there are three key counterpoints:
First, employment is a lagging indicator, and may be in secular decline. We've been through this a dozen times so I won't lay out all the points. But the main idea you may recall is that companies first go overboard in hiring (2004-2007), then they go overboard in firing (2008-2009), then they start to enjoy having fewer employees to pay (2009), and only later do they realize that to grow again they'll have to start re-hiring (2010-2012). At this point in the cycle, investors give companies bonus points for cutting expenses, and that means reducing headcount. So don't look for real investors to penalize companies' shares during periods of reduced employment.
Second, consumer saving is paradoxically terrible for consumers and a boon for banks and businesses, which is another reason stocks have been buoyant. You see, when families start to save a lot they tend to put their money in a bank savings account for safety. They'll earn 1% if they're lucky. On the other side of that 1%, laughing like crazy, are bankers who then turn around and loan that money out to big business at 6%-plus, or buy bonds yielding 4% to 12%. The banks are making a killing on consumer savings, which is really sad, but it's the truth. This is one reason we are overweight banks in our ETF portfolio.
Later on in the cycle, when the Federal Reserve starts to deploy its so-called "exit strategy" and begins to raise interest rates, the "spread" between what banks pay for money and what they can receive in corporate loans will narrow. And only then will banks turn their attention back to consumer loans, giving a new boost of fuel to that leg of the recovery.
Third, the volume is relatively low. I believe that the reason for this is that because the public is just not on board with this new bull cycle – yet. I'm not going to go through the math of all the cash sitting in money market accounts. But all of you reading this today, who care about stocks and are taking matters into your own hands, are in the minority.
Most of the public just doesn't care. They still feel wounded and abused by the market during the decline last year, and don't trust their money managers, and don't trust the recovery. So until the public starts to feel more comfortable again – probably when the Dow Jones Industrials gets back to around 12,500, which is where it was in the summer of 2008 – volume is probably going to stay light. Just ask your friends at work if you don't believe me.
Week in Review
Monday: The ISM Non-Manufacturing index pushed back into expansionary territory with a reading of 50.9 for September. This is the highest level since last May.
Tuesday: The bulls were spurred on by word that Australia's central bank unexpectedly raised interest rates by 0.25% basis points to 3.25%, becoming the first industrialized nation in the Group of 20 country to do so. While higher interest rates will eventually dampen stock returns, for now it's a sign the global financial system is awakening from its long coma.
Wednesday: Consumer credit fell by another $12 billion in August as American households cut back on purchases and pay down debt. This builds on the huge $19 billion decline in July. It was the seventh consecutive month of decline. While consumer deleveraging is bad in the near-term, as it weighs on retail sales, the long-term health of the economy improves as debt levels return to more normal levels. According to Deutsche Bank economists, households are about halfway done with the deleveraging process. And the more families stash cash, the more they are unwittingly lending their funds to banks and big business at the ridiculously low 1% passbook savings rate.
Thursday: Retailers reported the first monthly sales gain since August 2008. Retail Metrics' September comparable-store sales index jumped 1.1%. The rise was attributed to fresh fall fashions and attractive promotional offers.
Friday: Thanks to a weakened U.S. dollar and cheaper crude oil, the trade deficit narrowed by $31 billion in August — slightly better than the consensus estimate. Remember that a smaller trade deficit is a contributor to economic growth, so this will help the Q3 GDP numbers.
The Week Ahead
Monday (Today): The Columbus Day holiday. U.S. stock markets are open but the bond markets are closed. Canadian markets closed for Thanksgiving.
Tuesday: The release of the latest U.S. Treasury budget will likely weigh on the dollar and send Treasury yields higher. September has seen a positive budget balance over the last three years, but we're poised for a $31 billion deficit thanks to diminished tax receipts and stimulus spending.
Wednesday: Retail sales for September are reported. Analysts expect a 2.7% increase on a strong back-to-school shopping season. The results will be an important gauge of consumer health in the wake of the government's cash-for-clunkers auto rebate program.
Thursday: An update on inflation with September's CPI numbers. Also, the October Empire State Manufacturing survey will report on factory output in New York.
Friday: Industrial production is expected to have increased 0.2% in September after a nice 0.8% increase in August and a 1% jump in July. Recent gains have been powered by restocking of auto inventories at dealerships. Plus, an update on consumer sentiment.
We are also now coming into the heart of the earnings reporting season. Companies that could see a lot of action and move markets include brokerage The Charles Schwab Corp. (Nasdaq: SCHW) and construction retailer Fastenal (NASDAQ: FAST) on Monday; Johnson & Johnson (NYSE: JNJ) and Intel Corp. (NASDAQ: INTC) on Tuesday; JP Morgan Chase & Co (NYSE: JPM) and Abbot Laboratories (NYSE: ABT) on Wednesday; Harley-Davidson Inc. (NYSE: HOG), Citigroup Inc. (NYSE: C), Nokia Corp. (NYSE ADR: NOK) and International Business Machines Corp. (NYSE: IBM) on Thursday; and Bank of America Corp. (NYSE: BAC), General Electric Co. (NYSE: GE) Halliburton Co. (NYSE: HAL) and Mattel (NYSE: MAT) on Friday.
[Editor's Note: New Money Morning contributor Jon Markman is a veteran portfolio manager, commentator and author. He is currently the editor of two investment-research services, Strategic Advantage and Trader's Advantage. For information on obtaining a two-week free trial to the daily commentary of the Strategic Advantage, please click here. Anthony Mirhaydari was the research assistant on this column.]
News and Related Story Links:
- Economic Cycle Research Institute:
Official Web Site.
- Money Morning Market Analysis:
What Shape Will the U.S. Recession Take: U, W or 'Bloody L?'
- Money Morning:
Unemployment Figures Increase Odds of Jobless Recovery
- Money Morning:
Long-Term Stock-Market Uptrend to Continue
- Money Morning:
Fed Says Economy Picks Up But Keeps Lid on Interest Rates
- Money Morning:
Fed: Recession "Very Likely Over," but Threats Remain