Jon Markman at Money Morning describes the indicators that suggest a strong recovery is imminent. Excerpts below.
Link: Here’s Why the U.S. Rebound Will Be Stronger Than You Think – Jon D. Markman – Money Morning
What’s the best way to follow a Great Recession?
How about with a Great Recovery …
According to the latest data from the Economic Cycle Research Institute, the economy is poised for its strongest recovery in more than 30 years. The monthly growth rate of its Weekly Leading Index is now sitting at a level that has not been witnessed in at least four decades.
That’s big.
… the ECRI weekly leading index is the only gauge of the economy that I have found to have real usefulness as a forecasting tool. Unlike the linear measures that most indexes use, it uses non-parametric measures to look around the corner and figure out what’s coming.
It was early in calling the recession two years ago, and caught a lot of heat; and it was early in calling the recovery early this year, and has caught a lot of heat. ECRI chief Lakshman Achuthan told Reuters that with the WLI at new record highs, “the economic recovery will prove to be far more resilient in coming months than most believe possible.”
This evidence fits well into the envelope of views that I have expressed here repeatedly over the past few months: The path to recovery will be bumpy, with painful problems like stalled employment growth causing a lot of doubts and fears. But with governments and central banks pouring money into the global economy in unprecedented amounts via fiscal stimulus and low interest rates, we have a high level of conviction that the recovery is unstoppable, and that equities will continue to plow forward in anticipation of the fundamental improvements becoming more visible later.
Favorite positions to take advantage are still exchange-traded funds (ETFs) with heavy overseas and economic exposure. Right now that includes iShares Global Financial Sector Exchange Traded Fund (NYSE: IXG) and iShares Metals & Mining (NYSE: XME); on dips it includes iShares Emerging Markets (NYSE: EEM) and Vanguard FTSE World Ex-USA Small Cap (VFWIX). And after a brief period of underperformance, tech stocks might be ready to roll again, especially hardware like SPDR Semiconductors (NYSE: XSD).
Bears Still on the Prowl
But don’t get complacent – not now, not ever – because bears are still on the prowl. They still think they are going to win, and they are just looking for the right time to attack again – when bulls are vulnerable. I know this because I hear from them all day long.
Their main argument (from a fundamental perspective) continues to be that weak employment figures will undermine consumer buying during the holidays; consumers are saving more and spending less, and can’t get bank loans; and companies are deleveraging. And then from a technical perspective, bears also harp on the lack of volume in this up move. But there are three key counterpoints:
First, employment is a lagging indicator, and may be in secular decline. We’ve been through this a dozen times so I won’t lay out all the points. But the main idea you may recall is that companies first go overboard in hiring (2004-2007), then they go overboard in firing (2008-2009), then they start to enjoy having fewer employees to pay (2009), and only later do they realize that to grow again they’ll have to start re-hiring (2010-2012). At this point in the cycle, investors give companies bonus points for cutting expenses, and that means reducing headcount. So don’t look for real investors to penalize companies’ shares during periods of reduced employment.
Second, consumer saving is paradoxically terrible for consumers and a boon for banks and businesses, which is another reason stocks have been buoyant. You see, when families start to save a lot they tend to put their money in a bank savings account for safety. They’ll earn 1% if they’re lucky. On the other side of that 1%, laughing like crazy, are bankers who then turn around and loan that money out to big business at 6%-plus, or buy bonds yielding 4% to 12%. The banks are making a killing on consumer savings, which is really sad, but it’s the truth. This is one reason we are overweight banks in our ETF portfolio.
Later on in the cycle, when the Federal Reserve starts to deploy its so-called “exit strategy” and begins to raise interest rates, the “spread” between what banks pay for money and what they can receive in corporate loans will narrow. And only then will banks turn their attention back to consumer loans, giving a new boost of fuel to that leg of the recovery.
Third, the volume is relatively low. I believe that the reason for this is that because the public is just not on board with this new bull cycle – yet. I’m not going to go through the math of all the cash sitting in money market accounts. But all of you reading this today, who care about stocks and are taking matters into your own hands, are in the minority.
Most of the public just doesn’t care. They still feel wounded and abused by the market during the decline last year, and don’t trust their money managers, and don’t trust the recovery. So until the public starts to feel more comfortable again – probably when the Dow Jones Industrials gets back to around 12,500, which is where it was in the summer of 2008 – volume is probably going to stay light. Just ask your friends at work if you don’t believe me.
