What should we make of this odd market of the spring of 2009? Valuations have been moving up smartly, giving battered investors some kind of hope were into a new bull market. But what do we really have to get excited about? Lets look at the pros and cons of this spring bull.
People really want stocks to go up.
According to rumour the U.S. government has been acting in stock markets, jumping in with its own money to provide buying support when things look most dire (this, goes the rumour, accounts for big end of day buying recently).
The price of oil may have gotten ahead of itself. With U.S. use down something like 7% there is a lot of extra crude sloshing around the system. If the price comes off in the short-term that will relieve pressure on the rest of the economy.
The recent U.S. bank stress tests suggest that if the economy worsens banks are sitting on losses of more than $500 billion.
U.K. sovereign debt has been downgraded. Recent auctions of U.K. and U.S. sovereign debt havent been well attended.
Public debt is already ramping up in a bid to provide stimulus, just a few years before western populations really start retiring, an event that will bring with it yet lower levels of consumer spending and more government outlays.
Consumer spending (based on a generation of rising consumer indebtedness) is falling, seemingly permanently. That means lower earnings for corporations.
If consumers arent going to drive this recovery, what will?
Oil is already back above US$60, hurting the average consumer (see above).
According to Houston-based brokerage Raymond James, real oil production peaked last quarter.
According to some reports, money is moving en masse to Asia right now, putting downward pressure on U.S. assets and the U.S. dollar. Investors are hedging that move in oil.
Current growth is really just a bit of a restocking of the shelves. This is not the beginning of a new growth cycle.
Trends over medium-term (retiring boomers) are brutal.
Boomers with devastated defined contribution plans are going to be in big trouble and may eventually have to sell stocks to pay other bills. The end of equity culture?
The Federal Reserve just increased its estimates for the total contraction in the economy this year. (What was going to be shrinkage of 0.5% or 1.3% is now 1.3 or 2%.)
Minutes of last Fed meeting are downbeat.
All in, its hard to think weve got a huge and sustainable rally here. Hopefully this sticks, and maybe it will for the summer. But there just don’t seem to be any compelling reasons to think corporate earnings are going to increase, which, at the end of the day is the one thing that can drive stock markets higher.