The Dow Jones industrial average has achieved a new 52-week high already this month, trading above 13,300 for the first time since December 2007. This is evidence that US blue chips continued to attract new buyers. However, these new highs have thus far taken place with less participation from the broader market to this point. The NYSE bullish percent moved to a Bear Alert status on April 10 with a reading of 67.67%. Since that date, the Dow has gained 4.4% with new highs along the line the NYSE bullish percent has instead fallen to 66.50%. This is an early indication that while the generals continue to wage war, the soldiers are increasingly reluctant to reenter the battlefield.
In layman’s terms, what this means is what I have observed during this last quarter’s rally. The smart money, institutional players are back in the market, while the individual investor is still on the sidelines. This is nothing new and is a regular occurrence, especially after a severe recession. My take on this is that I am not surprised that the markets are trending downward or what is commonly known as consolidation.
The unemployment report was released this morning for last week. The 365,000 is a decrease of 27,000, which was an upward revision of 3000 from the previous week, the less volatile and closely watched four-week moving average came in at 383,500 arise of 750. With the latest revisions, the four-week moving average has risen for seven of the last nine weeks. Obviously, we’re in a slow growth, economic recovery, which will remain until the political uncertainties have become certain.
Part of the problem of the retail investor staying on the sidelines is the fear of the next recession. The conjecture about the next recession has raged ever since the end of the last. Would be in 2012 or 2013 or, if you believe that many mainstream economist estimates, never? Historically speaking, recessions have occurred on the average of about every 6 to 8 years regardless of monetary or physical policies, the strength of the economy or global peace-they occur nonetheless. Recessions do not just happen. They need a push. In 2011, the economy was just a breath away from a recession due to the dual impact of the Japanese earthquake and tsunami and the European debt crisis. Had it not been for the combined efforts of the fed through operation twist and the long-term refinancing operations of the ECB, a drop in oil prices and a plunging utility cost due to the warmest weather and 65 years, is entirely likely that we may have already been discussing the current recession.
In a more normal post-recessionary recovery, the third-year should be closer to a 6 to 8% economic growth rate versus 2%. While 2% growth is much better than zero, the current subpar pace of growth leaves the economy standing on the edge of the pool with very little stability offset any unexpected push into the cold waters of recession. The problem is identifying what that push could likely be.
With the euro zone slipping into recession, combined with the economic con traction in China, the most likely event will be an export related slowdown for the US. The recent plunging durable goods, and factory orders, and many of the regional manufacturing reports points to early signs of a slowdown. A resurgence of the euro zone crisis that leads to a liquidity shock would likely stall the lobby ECB has currently committed funds to provide liquidity to the euro zone, the problem of a single large potential default issue from either Italy or Spain, or even a combination of events through the entire region, could quickly create liquidity crisis. There is also the occurrence of a black swan event that is completely off the radar. The earthquake last year is an example of one.
My biggest concern is the impending physical Cliff coming at the end of 2012, where a plethora of tax cuts, credits and incentives, many left over from the Bush era and extended by the Obama administration, will collectively expire. This is no small matter. The simultaneously expirations of these tax benefits will create a 2% hit to GDP, which, given the associated fallout across the economy, with more than sufficient to create a recession. However, I did not expect this to happen, even though it is been there lately a topic of great debate. Regardless of the winner of the next presidential election, the economic impact of physical Cliff is will know therefore, it is extremely likely, since no one in Washington wants to take the responsibility of taking away the government cheese, that another round of extensions for most of the tax benefits we are.
What we must realize and accept is there is always an impending recession. When and how severe no one knows. The problem for most individuals is that they did nothing to prepare for the event until it was too late. Preparation, such as taking a number Ella with you when you suspect that it will rain, can save you from negative consequences. Understanding that a recession will occur in preparing accordingly will save you well.
One of the principles I teach my clients is that if your portfolio is based on an economic prediction then you have a flawed investment policy.
Thanks for reading.