After starting the week with a broad-based sell-off, stock markets resumed their 5-month uptrend as investors’ confidence in the recovery prospects of the global economy gained traction. With risky assets back in favor, a number of bourses and crude oil closed at fresh highs for the year, showing resilience in the face of a sharp correction in China on Monday (-5.8%) and Wednesday (-4.3%). Safe-haven assets such as government bonds and the US dollar received a cold shoulder.
Referring to the nascent economic recovery, Paul Kasriel and Asha Bangalore (Northern Trust) said:
“There is concern being voiced that after the fiscal stimulus wears off, the economy will lapse back into a recession. Anything is possible, but that does not necessarily make it highly probable. In the post-WII era, once the US economy has gained forward motion, it has maintained that forward motion until the Federal Reserve has intervened to halt it.
“We believe that the earliest the Fed will begin to take action to brake the pace of nominal economic activity will be late-June of 2010. And if it begins to take action then, it will do so only tentatively. If, in fact, economic activity is flagging from a lack of additional fiscal stimulus, then the Fed is unlikely to commence tightening or would reverse course. We believe that the next recession, whenever it occurs, will be precipitated by the lagged effects of Fed tightening, not by the economy ‘running out of gas’ on its own.”
The past week’s performance of the major asset classes is summarized by the chart below -- a set of numbers that indicates renewed investor appetite for risky assets.
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index
(+1.6%) and MSCI Emerging Markets Index
(-0.8%) followed separate paths last week as China and a number of emerging markets came under pressure during the first few trading days. Emerging markets have now underperformed developed markets for 3 weeks running.
According to fund trackers EPFR Global (via the Financial Times
), equity funds investing in China had their worst week since first quarter 2008, while outflows from equity funds targeting global emerging markets and Asia ex-Japan recorded 24-week and year-to-date highs respectively.
Top performers in the stock markets this week were Cyprus (+7.0%), Turkey (+6.5%), Greece (+5.9%), Poland (+5.9%), and Sweden (+4.2%). The top positions were all occupied by European countries where the region could emerge from recession sooner than previously expected. At the bottom end of the performance rankings, countries included Nigeria (-9.3%), Taiwan (-5.1%), Kyrgyzstan (-4.2%), Qatar (-4.0%), and Australia (-3.8%).
After surging by 90.7% since the beginning of the year to its peak on August 4, the Chinese Shanghai Composite Index
plunged by 19.8% over the course of the following 11 trading days, but clawed back 6.3% during the last 2 days of the week as pundits realized that the tightening of monetary policy in China was not imminent. The Japanese Nikkei 225 Average
(-3.4%) fell in tandem with the Chinese and other Asian markets.
The S&P 500 Index,
back above the psychological 1,000 level, has surged by 51.7% since the March 9 low. “One argument the bears use is that we saw a number of similar bear market rallies that were this extreme during the overall 86% decline that the market saw from September 1929 to June 1932,” said Bespoke
. “However, as shown below, the current rally is now bigger and longer than any of the rallies seen during the 1929 to 1932 crash. The biggest rally during the '29 to '32 period was 46.8% over 148 days.”
Of the 94 stock markets I keep on my radar screen, 47% (last week 63%) recorded gains, 47% (33%) showed losses, and 4% (4%) remained unchanged. (Click here
to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the winners for the week included SPDR S&P International Financial Sector
(IPF) (+7.4%), iShares MSCI Turkey
(TUR) (+7.2%), Market Vectors Environmental Services
(EVX) (+6.7%), United States Oil
(USO) (+6.1%), and iShares US Oil Equipment and Services
At the bottom end of the performance rankings, ETFs included United States Natural Gas
(UNG) (-9.1%) (natural gas prices dropped to a 7-year low on worries about a supply glut), PowerShares Preferred Financial
(PGF) (-7.8%), Market Vectors Solar
(KWT) (-5.9%) and Claymore/MAC Global Solar Energy
On the credit front, the chart below comes from the annual report of the Bank for International Settlements (via Casey’s Daily Dispatch
) and shows that the crisis has developed in 5 distinct stages. Stage 5, beginning in March 2009, shows the rally in the MSCI World Index (red line), as well as the significant improvement in the LIBOR-OIS (overnight index swap) spread (blue) and the CDS spread of 18 international banks (green) -- heading towards the pre-crisis levels.
Other news is that the US government’s popular Cash-for-Clunkers car sales-incentive program has burnt through most of its $3 billion funding in just one month and will come to an end on Monday, August 24. Meanwhile, the Federal Deposit Insurance Corp (FDIC) seized the Guaranty Bank of Austin on Friday, bringing the tally of US bank failures in 2009 to 81.
Referring to the stock market rally that is exceeding most expectations, the quote du jour this week comes from Brian Wesbury and Robert Stein of First Trust Advisors who wrote as follows in Forbes
“The way we see it, those who were pessimistic about stocks and the economy early this year are going through the classic five stages of grief. First, they denied a recovery was going to happen anytime soon. Then they lashed out with anger at those who spotted signs of the recovery. Now, they are bargaining, admitting the existence of the recovery that they did not see coming, but belittling it. Next, as things keep moving up, we can expect them to get depressed. We don't expect acceptance to fully set in until late next year.”
Not everybody is in agreement with Wesbury and Stein, as gathered from David Rosenberg’s latest research report (Gluskin Sheff & Associates), saying:
“Econometric models we ran show that the S&P 500 has 4.0% real GDP growth priced in ... Now at the stock market bottom in March, the S&P 500 was priced for -2.5% real GDP, which is exactly what we are going to get this year, so the notion that the S&P 500 was egregiously undervalued back at 666 does not bear up to scrutiny. At the time, that level was completely realistic in light of the macro outlook.”
The key moving-average levels for the major US indices, the BRIC countries and South Africa (where I'm based) are given in the table below. With the exception of the Chinese Shanghai Composite Index, which fell below its 50-day moving average just more than a week ago, all the indices are trading above their respective 50- and 200-day moving averages. The 50-day lines are also in all instances above the 200-day lines and therefore not threatening the bullish “golden crosses
” established when the 50-day averages broke upwards through the 200-day averages.
The short-term support levels for the major US markets are as follows: Dow Jones Industrial Index
(9,135), S&P 500 Index (980) and NASDAQ Composite Index
David Fuller (Fullermoney) from across the pond said:
“The end game for this bullish phase [on stock markets] needs to be considered well before the event. While the timing is largely guesswork at this stage, the usual causes are not. Bull markets are usually assassinated by tighter monetary policy.
“A good, although not precise, indicator of bear market risk will be provided by the yield curve, currently showing the premium of US 10-year over 2-year government yields. Years often go by before this chart shows anything important but it should not be forgotten by any of us. When this next approaches 0.0, we should have at least trailing stops, mental or actual, for all of our equity long positions. When it inverts to negative, indicating that 2-year rates are higher than 10-year rates, and the longer it stays negative, the more we should assume that a bear market is approaching.
“The good news today, is that the next inverted yield curve is probably years away. Consequently, it would most likely take a true 'black swan' to derail the current bull market anytime soon. These are unpredictable by definition so I would not worry about them without evidence of a game-changing event. Meanwhile, setbacks in response to normal 'wall of worry' market volatility can be regarded as buying opportunities in favored assets."
I've discussed valuation levels and technical indicators in my recent posts (see below), but another factor that will come into play is seasonality turning negative. Focusing on the S&P 500, I've done a short analysis of the historical pattern of monthly returns for this index from 1957 to mid-2009. The results are summarized in the graph below.
If one looks at the average return per month and in which months the most market declines have occurred, it seems as if the months of June, August, and September are traditionally bad for stock markets. Although June this year played according to script, with the S&P 500 showing a zero return, July excelled with a 7.4% gain. August (+3.9%) is comfortably ahead of the norm but, given the overbought level of markets, it's conceivable that the “bad” month of September -- over time the month with the lowest average monthly return -- might conform to the historical pattern Economy
The Recession Status Map below, courtesy of Dismal Scientist Economy.com, aggregates growth statistics from around the world and allows one to see at a glance which economies are in recession, at risk, or beginning to recover.
“Global business confidence remained positive last week for the second straight week. The last time confidence was consistently positive was nearly a year ago,” said the latest Survey of Business Confidence of the World by Moody’s Economy.com. (The chart below uses a 4-week moving average and is therefore not yet reflecting the break above the zero line.) Businesses are responding most positively to broad assessments of the current economic environment and the outlook into early 2010; they're as strong as they've been since the financial crisis first hit in the summer of 2007. The Survey results suggest that the global recession is coming to an end, but isn't quite over yet.
According to MarketWatch
, Olivier Blanchard, the top economist for the International Monetary Fund, said on Tuesday the global recession was over and a recovery had begun. “The turnaround will not be simple. The crisis has left deep scars, which will affect both supply and demand for many years to come,” Blancard wrote in an article released by the IMF. He said growth was still highly dependent on government stimulus from fiscal and monetary policies and sustainable growth “will require delicate rebalancing acts, both within and across countries.”
Japan last week emerged from recession (not yet reflected on the map above), with its economy growing by 0.9% in the 3 months to June, marking the first expansion in 5 quarters on the back of private consumption, net exports and government stimulus spending. After the worst quarter on record, Hong Kong also returned to growth in the second quarter of 2009, expanding 3.3% quarter on quarter.
The eurozone composite Purchasing Managers Index
rose to a 15-month high of 50 in August from 47 in July -- the biggest monthly increase on record. The 50 level separates expansion from contraction and the strong improvement seems to indicate that the eurozone could emerge from recession in the third quarter.
A snapshot of the week’s US economic reports is provided below. August 21
Sales of existing homes advance, inventories flat, and prices falling less rapidly
Initial jobless claims edge up for second consecutive week -- it's not unusualAugust 19
Home construction is recovering, albeit at a slow pace
Wholesale prices of food, energy and core items fall in July
Senior Loan Officer Opinion Survey -- small positive signals but several aspects remain bothersome
Housing Market Index shows noteworthy improvement
Japan -- the end of the latest recession The global economy is now beginning to emerge from its worst crisis in generations, but the downturn might have been much worse if central banks hadn’t acted so forcefully last fall, Federal Reserve Chairman Ben Bernanke said on Friday in a speech
at the Kansas City Fed’s annual retreat in Jackson Hole, as reported by MarketWatch
The chart below, courtesy of US Global Investors, shows the results of the Fed’s Senior Loan Officer Opinion Survey. An inverted scale is used, i.e. when the percentage of banks tightening their lending standards increases, the line trends down and vice versa. As indicated, the trend in lending standards has historically been closely correlated with the year-on-year change in private non-residential fixed investment, or capex, lagged by 3 quarters.
The lending standards data for July were released last week and show that a net 31.5% of large banks were tightening their lending criteria versus a net 83.6% last October, resulting in the line trending up. Based on the historical relationship, one would expect capex to start rising soon. Although not shown, the research also indicates a similar correlation between lending standards and both industrial production and total non-farm employees, implying these should also soon start trending up.
Dampening some of the enthusiasm, Nouriel Roubini (RGE Monitor) said (via Forbes
“I now anticipate that policy measures and other factors will boost real GDP growth, albeit in a temporary manner, in the second half of 2009. Yet the shape of the recovery (will it be V, U or W?) and other challenges will influence the US economic outlook going forward. Growth will remain well below potential in 2010, while the shape of the recovery will be closer to a U.”
Week’s Economic Reports
for the week’s economy in pictures, courtesy of Jake of EconomPic Data. Click here
for the weekly economic calendar from Yahoo.
The US economic data reports for the week include the following:August 24
S&P/Case-Shiller Home Price IndexAugust 26
Durable goods orders
New home sales
Initial jobless claims
Second quarter GDP
Personal income and spending
Michigan Sentiment Index
The performance chart
obtained from the Wall Street Journal Online
shows how different global financial markets performed during the past week.
“Some people are addicted to seeing catastrophe in the future,” said the late Peter Bernstein, author of Against the Gods, The Remarkable Story of Risk.
Readers should go about making investment decisions in a level-headed manner and steer away from excessive pessimism (or extreme optimism).
That’s the way it looks from Cape Town (where I’m making final arrangements to take a group of local business people to Slovenia in 10 days’ time -- let me know if you'd like to meet with us in Ljubljana).