Economy improves, yet stocks struggle
The market is still spooked by the prospect of Fed tapering, despite signs of a global recovery.
Things are getting better. No really, they are.
The Eurozone has officially exited its longest recession on record. Factories around the world are spooling up to replenish drained inventories. The U.S. trade deficit narrowed to levels not seen since 2009. And declining labor productivity is forcing companies to hire, helping boost the job market. As a result, we're looking at a healthy reacceleration in global GDP growth in the second half of 2013.
But stocks are dancing to a different tune entirely. The Dow Jones Industrial Average is falling towards its 50-day moving average for the first time since June. Breadth is narrowing. There's been a record cluster of "Hindenburg Omens" -- a technical indicator that points to internal market dislocations. So, what gives?
Weakness abounds. The number of S&P 500 stocks in uptrend has begun to roll over, something that was last seen in late May as the market was topping. You can see this in the chart below.
It's a market that simply doesn't know what to do. For so long, it's been simple: Buy stocks based on the prospect of cheap money stimulus from global central banks. And there were derivatives on this idea, such as buying bond-like stocks since the Federal Reserve as pushing interest rates down so hard.
Starting in May, after the Fed started talking up a tapering of its $85 billion-a-month bond purchase stimulus, it all changed. Bond yields climbed, pushing up long-term interest rates. Bond-like stocks were crushed. Suddenly, that warm, comforting blanket of monetary stimulus became the wet towel of policy normalization.
The cheap money addicts on Wall Street are suffering from withdrawal. And because of this, they are ignoring some very real signs of progress in the real economy. Consider the rebound in Europe, where the region returned to growth in the second quarter, ending six consecutive quarters of recession.
Yesterday, we got a positive German business confidence survey, a solid Eurozone industrial production report, and a strong core U.S. retail sales report. Sales at U.S. department stores increased 0.6% last month, the biggest gain since March 2012.
And thus, certain areas of the market keyed into a rebound in global growth such as steelmakers are actually surging higher. The Market Vectors Steel (MV) is on the move for the first time since December. In my Edge Letter Sample Portfolio, Cliffs Natural Resources (CLF) is up more than 9.3% since I added it on Friday. Companhia Siderurgica Nacional (SID) is up more than 8.2%.
Precious metals stocks are also on the move as inflationary pressures accumulate in the supply chain. Lake Shore Gold (LSG) is up 15.4% since I added it on Monday. The ProShares UltraSilver (USLV) is up 5.8%.
The problem, I believe, is that the prospect of the Fed's stimulus taper in September and the potential of another fiscal food fight and a government shutdown on October 1 have pushed many investors to the sidelines. Risks are rising. And conservative investors would be wise to take a step back, raise some cash, and wait out the turbulence.
But for more aggressive traders, the positive economic news is creating a very lucrative tailwind in stocks -- such as steelmakers and silver miners -- that are attractively valued after being shunned for so long.
It's a mixed outlook heading into the end of the year. And thus, a mixed portfolio allocation is appropriate with targeted longs in metals, a few short ideas such as my bet against Sumitomo Mitsui Financial (SMFG), and an increase in cash.
The currency markets are also relatively calm, which means any market pullback should be relatively orderly.
Disclosure: Anthony has recommended USLV to his clients.
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17 Trillion Public Debt.
100 Trillion in Unfunded Liabilites (probably a fair estimate).
1 Trillion of Funny Money per annum.
800 Billion in deficits per annum. (may edge up back to 1.2 Trillion).
A failing education system.
Loss of global competitiveness shackled with free trade.
Economy getting better? No. Printing and Federal Deficits are simply making it look that way.
Another Recession imminent? Yes. 2014 or 2015.
V_L (although from some of the responses past gotten over time that think you are not in tune with things)...you have been right on lately.. even though we have sometimes disagree, past.
Micron laying off 1500 more here, locally. Not a peep and my State is already 50% on welfare.
Things are improving? Where? Show me and do give QE or government figmented stats on any front you can choose. Sheep to the slaughter is coming with the millenials....just look around the world....total chaos. Anarchy may be closer then we all want to believe right here.
I used to say that any business was doomed once accountants and lawyers took over its management. In the last few years I’ve added economists, Wall Street speculators, and bankers to the list of culprits.
Many experts think the Chinese economy is contracting. The Japanese economy has taken step backward. The European Economies have had their first non-recession quarter after 1 1/2 years of E.U. recession. The American economy is struggling along at less than a 2% annual growth rate.
But "we're looking at a healthy reacceleration in global GDP growth." Really?
And if we are, the S&P 500 returned over 6%, including dividends, in July alone! It's up 17% including divs. for the year.
So how can you complain about the market? That it's only up 1 point in August so far?
Wall Street still thinks that it controls what happens in this country and to a certain degree they are right, but unfortunately for them world conditions are improving and if they start shorting stocks just because their free money is drying up and people see how Europe etc is doing fine then we may see a resurgence of the Occupy movement which this time will probably result in Wall Street and greedy corporate entities getting their A$$es handed to them on a pink slip along with a huge tax bill.
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The back-to-school season could be strong, and this year's holiday season could follow suit.
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