Market Sees Economic Glass as Half-Empty
The market is too focused on declines in lagging indicators and is missing the improvements in indicators that tend to lead us out of a recession.
The markets overreacted to the economic news this week, in my opinion. While the general tone of the economic indicators and analyst comments we focus on were positive, a number of the lagging and coincident indicators remained quite negative. The market chose to focus on the half-empty glass, particularly with regard to the employment numbers, and the Dow fell 1.9% for the week. I saw little reason to change my view that the second-quarter GDP will be more negative than most are expecting (though much better the first quarter). However, reduced inventories and an improving auto industry could set the stage for growth in excess of 2% in the second half of 2009.
The best news this week was a sharp improvement in the Case-Shiller Home Price Index, as discussed by our housing analyst, Eric Landry. Housing prices shown in the report slipped just 0.6% versus a decline of just over 2% for each of the prior two months. According to Landry, this was the sharpest improvement in the history of the index. Additionally, eight of the 20 markets measured in this index saw price increases, and an additional 11 markets saw a slower rate of price declines. This is all great news as we believe housing led the economy into the current mess and will have to at least stabilize before we can see substantial improvement. As prices firm, I expect to see sales volumes continue to improve as customers begin to fear that they will miss the bottom of the market.
This week's purchasing managers survey (PMI) from the ISM and last week's durable goods order numbers paint an improving picture for the hard-hit manufacturing sector for the upcoming months. The PMI has been trending positive since December. And although the new orders component of this widely watched index, which has been on a tear the last few months, flattened in June, the individual index components that had been lagging, such as employment and backlogs, looked much better in June. This is great news because the PMI and manufacturing orders have proven to be great leading indicators in past recessions. I've also heard from our metals team that they are now seeing some signs of a bottom in the steel sector. Analyst Min Ye reported that utilization rates at U.S. factories moved up from the low 40s to the high 40s and that U.S. steel manufacturers had raised prices by about 5% (albeit from very, very low levels).