10-7-09: Cross-Currents
October 7th, 2009
It is difficult to imagine anyone having predicted this market move. Fundamental-leaning analysts now point out how “cheap” the market was in February and March from a historic PE perspective. Technical-leaning analysts can point to a variety of occurrences from spring 2009 and confidently say (now) that the market was bottoming. As you most likely recall, there was not a bell that sounded when the market hit its low in March. Neither was there a bell that sounded in March 2000 nor October 2007 just before the S&P 500 reversed into respective 50.7% and 57.7% declines.
The Economy
· Final Q2 GDP came out on September 30 at -0.7% vs. expectations of -1.0%. This came after Advanced and Preliminary Q2 GDP came in at -1.0%. Q2 made the fourth consecutive quarter in which GDP contracted; the most ever. Possibly, the unprecedented duration of GDP contraction is feeding the widespread belief that things simply MUST get better from here.
Employment
· On September 30, ADP reported September Employment of -254,000 (est. was -210,000). This was the sixth consecutive monthly improvement in the series but also the twentieth consecutive month of job loss.
· On October 2, the government reported Non-Farm payrolls for September at -263,000 (est. was -173,000); the twenty-first consecutive month of job loss. September Employment fell for the first month since June 2009 when payrolls contracted from -345,000 to -467,000.
· Unemployment came in at 9.8%; in line with estimates but a new twenty-six year high.
· In an October 5 Wall Street Journal article titled, “It Will be Years Before Lost Jobs Return—and Many Never Will”, it was estimated that the economy needs to average 2.15 million job additions per year for the next eight years in order to return to 5% unemployment. This estimate considers replacing the 7.2 million jobs lost in the current recession as well as keeping pace with population growth. That job growth rate is approximately double the rate of 2001-2007.
The Market
A growing expectation (now almost an assumption) of rapid Economic recovery continues to drive the Equity markets. Rallies from the respective March 2009 lows to 2009 highs (on September 23) are: Dow 30 +53.29%, S&P 500 +61.99%, Naz 100 +68.64%, and Ru 2000 +82.52%. Looking at the October 2007 to March 2009 declines, the major averages are nearing some significant long-term technical challenges. For the Dow 30 and S&P 500, 10,334 and 1121 are respective 50% retracements of the 2007-2009 declines. For the Naz 100 and Ru 2000, 1773 and 660 are respective 61.8% upside retracements of the 2007-2008/9 declines. (Naz 100 set its bear market low in November 2008).
Market momentum is a difficult concept to harness. Presently, investors are overwhelmingly bullish; despite the $10-11 Trillion in stimulus/bailouts/guarantees that the government has extended. The market rally that began in March has frustrated all attempts to apply any sustained selling pressure. The most focused period of selling in the current trend phase occurred during June-July when the Averages declined as follows: Dow 30: -8.91% over nineteen days ending July 8, S&P 500: -10.45% over nineteen days ending July 8, Naz 100: -7.74% over nineteen days ending July 8, and Ru 2000: -11.63% over twenty-four days ending July 8.
With earnings season queued up, it seems that investors (based on major average prices) are well beyond the glass-is-half-full mentality. Rather, the glass is quite full and few, in any, market participants are expecting anything to tip it over.