Critical Economic and Market Commentary | 3.18.10

Posted At : March 19, 2010 11:05 AM

Market Update: The little engine that could…but does anyone care?

The market has been making new highs of late and investors are treating it with a collective yawn of indifference. Regardless of the advance of the last year, fear and mistrust continue to take permeate. It feels like investors have been stubbornly ignoring the reality in the hopes that the market behaves the same as feelings… dismal. This is actually to be expected given the drubbing investors have taken over the last decade. Even more interesting is that this is quite typical of early bull market moves which are typically met with:

    * Disbelief: (nothing has changed, the fundamentals are terrible, sales are down, earnings are tanking, etc.)
    * Skepticism: (rally has gone too far too fast, need to wait to see a change in real sales, etc.)
    * Waiting for a pullback: (okay it looks like things are turning around, but prices will pull back and I will get back in, etc.)

Even with a one-year rally of almost historical proportions, investors remain in a very skeptical market. Tremendous amounts of cash remain on the sidelines. The percentage of bullish advisors remains less than 50%. Cash is still pouring into bond funds yielding single digit returns. Hey, I feel it too. My heart tells me that the next crash is only seconds away but my head tells me otherwise. The economic #’s are most definitely improving. Not dramatically, but improving none the less. The leading indicators recently reached a level of 107.5, (a 50 year high), the purchasing managers index 56.5 (any # over 50 is a welcome sign of expansion) and most importantly banks are lending again.

The Reason the Stock Market Can Rise While the Economy Languishes

As the Baby Boomers retire and leave the workforce, the largest segment of U.S. Population in history will become net savers from net spenders. It is estimated that demand will decline a staggering 40%! That’s a lot less need for goods, services and therefore jobs. The companies that adjusted quickly will thrive while the dinosaurs will perish. That’s why the market is rising while the economy flounders. Because many individual companies that adapted quickly are benefitting at the expense of those that did not.

In a bullish economy all do well. In a bearish economy, it’s a zero-sum game. The drag on the economy will continue to be unemployment as companies “right size” in order to adjust to the new normal, a lower rate of demand of goods and services. At the moment the government is making up for lagging consumer spending. When this life support ends, watch out.

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