Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
BREWING FINANCIAL CRISIS 2.0 Suggests RECESSION 2022 - 28th Jan 22
Financial Stocks Sector ETF XLF $37.50 Continues To Present Opportunities - 28th Jan 22
Stock Market Rushing Headlong - 28th Jan 22
The right way to play Climate Change Investing (not green energy stocks) - 28th Jan 22
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is Economic Recovery Closer Than You Think?

Economics / US Economy Jun 16, 2009 - 01:41 AM GMT

By: Q1_Publishing

Economics

Best Financial Markets Analysis ArticleThe divide between bull and bear camps is growing wider each day.

There isn’t much middle ground. You’re either in it, waiting for a pullback, or waiting for the collapse.


Despite the divide, the market shows considerable strength. And the big question remains, “Where are the markets headed from here?”

Frankly, there’s still no easy answer. This is the stock market. It’s nearly impossible to predict what is going to happen in the short-term. That doesn’t mean it’s impossible to tell. We just have to find the right sources of information. As usual, the mainstream press is little help.

The Wall Street Journal points out “stocks [are] in the black on gusher of cash.”

The latest Barron’s warns the recent rally has gone “too far, too fast.”

Not much clarification there. But if you look beyond the headlines, you can get a good idea of what’s likely to happen. And that’s what’s important. Figuring out what is likely to happen. Then get positioned.

The Bull Picks up Speed

The best catalyst for a market rise will come from improving investor confidence. All signs point to it continuing to rise.

Retail investors continue to get in on the action. Last week marked the 12th week in a row investors put more money into mutual funds. The Investment Company Institute said another $13.6 billion was poured into mutual funds last week. The increase was broad too. It spread across equity, international, and bond funds.

Institutional investors are starting to get on board too. The last Investor’s Intelligence survey puts bullish sentiment at 47.7%. It pegged bearish sentiment at 23.3%. That works out to two bulls for every bear.

It seems investors’ willingness to dip their toes back in the market waters is growing consistently. But investors are fickle. Confidence can evaporate quickly. So despite the positive sentiment, we’ve reached a point where the economy needs to show some genuine signs of recovery before they plow a lot of money back into the markets.

The following three charts show there could be a recovery sooner rather than later. And they help show why I believe this rally has a lot more gas left in the tank than most people think.

Financial Services on the Mend

We’ve come a long way in the past few months. The financial services industry has been leading the way.

The sharp recovery of the Bloomberg Financial Services Index (Hat tip: Mark Perry at Carpe Diem blog) shows a recovery is just around the corner.

The Bloomberg Financial Services Index is “a useful gauge to assess banking and lending conditions and the availability of credit in the United States.” So when the index is up, access to credit is high. When the index is down, access to credit is low. As you can see in the chart below, the index access to credit has been recovering quickly.

The index has been slowly working its way back to normal. It’s even getting close to late 2007 levels. That was a time when the market was getting its first whiff of the problems in the banking sector.

Credit flowing again is just part of the story here though. Another big benefit of the financial services industry getting moving again is a lot of people will get paid.

Remember, financial services play a large role in the U.S. economy. Decades of “financialization” have made the financial services industry an integral part of the economy. At the height of the bubble, 4.5% of all workers, 7.5% of all compensation, and 8% of total GDP all came from financial services. That’s why there must be a recovery in the financial services industry for economic growth to turn positive in the short term. It’s just such a big part.

Of course, it’s not just financial services which need to get back to normal. Consumers need to start spending again too.

Buying Our Way Out

The consumer-centric U.S. economy is not going to change overnight. Sure, people have started saving again. They’re paying down debts. And they’re (generally) acting more responsibly. They’re also starting to spend again too.

The shopping itch is back. The chart below from Market Harmonics shows consumers are more willing than they have been in months to scratch it.

Last month marked the third straight month of rising consumer confidence. Granted the rebound has been from rock-bottom lows, but it’s a rise back to pre-credit crunch levels.

This is important because consumer confidence moves in long sweeping trends. Basically, the long trends mean consumer confidence is part of a self-reinforcing cycle. As some consumers start shopping again, more follow. The more consumer confidence rises, the more consumers get on board.

It’s all part of a virtuous cycle. So if this uptrend is sustainable, it can stay steadily rising for a long time to come.

Just like financial services and credit availability, consumer confidence is just one part of a bigger economic puzzle. Another key part, manufacturing, has to return to a somewhat normal level as well.

Manufacturing a Recovery

Although manufacturing has steadily become a smaller part of the U.S. economy, it’s still an important part. That’s why it’s another good sign to see the early markings of a recovery in manufacturing activity.

In the chart below, you can see how the decline in manufacturing activity is starting to slow.

The chart tracks the monthly Institute for Supply Management’s manufacturing activity index. A reading above 50 means manufacturing activity is increasing. A reading below 50 means manufacturing activity is decreasing.

The chart shows manufacturing activity has declined every month for over a year. The decline started with a slight contraction. Then when the credit crunch hit, manufacturing activity plummeted.

The bad news is manufacturing activity still hasn’t recovered.

The good news is manufacturing activity is closer to a recovery now than it has been in the past nine months. The improving trend shows how there could realistically be an increase in manufacturing activity before the end of 2009.

Although it’s hardly one of the “green shoots” yet, any monthly uptick in manufacturing activity would be welcomed greatly by the markets.

It’s All About Odds

And that’s what really matters here, the markets. We want to know where the markets are going. So with all investors’ eyes on the economy, that’s where we’ll need to focus.

The way things look, the economy is showing improving signs of strength. With credit flowing again, the financial services showing signs of “normalization,” consumer confidence increasing, and the manufacturing sector on the mend, the prospect of a recovery is very real.

That’s why I encourage you to look past the week to week economic data. The short-term readings can make some interesting headlines, but the trends are what matters most. Right now, the negative economic trends are reversing. And we can’t rule out a couple of quarters of GDP growth over the horizon.

It’s all a big reason why odds of the next market move being higher – especially as the major indices sit 40% below their all-time highs.

In the end, we can’t forget investing is all about odds and analyzing risk and reward. According to the three indicators we went over today, the odds of seeing some official GDP growth within the next year are rising steadily. Along with further economic improvement, will come improved earnings, employment, and another leg up for the markets.

From a risk and reward perspective, a continued economic recovery and market rally make quite a few sectors attractive. Although it’s tough to find a specific sector which hasn’t participated in the rally, there are some which still offer some very good values.

So whether you consider yourself in the bull or bear camp, take the conservative steps to position yourself for where the market is likely headed.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Q1 Publishing Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in