Some Promising Signs for the Economy and the Equity Market

Here at "A Dash" we try to identify and monitor the best sources and indicators.  This is extremely important.  Without a disciplined approach, the average person gravitates to sources and evidence supporting his/her current viewpoint -- the confirmation bias.

In a time when most of the economic news is grim, it is especially important to seek out leading indicators.  It is equally important to recognize data related to the long-term economic challenges.

The Recession Might be Over.  So says the Economic Cycle Resesarch Institute (ECRI), long one of our favored sources, and accurate on the start of the current recession.  One might contrast the ECRI prediction with assorted pundits who predicted a recession for years before it occurred.

Writing for RealMoney (subscription required, trial available) Anirvan Banerji reports that the ECRI leading indicators are showing significant strength.

What's impressive here is the degree of unanimity within and across these leading indices, along with the classic sequence of advances in those indices. Such a combination of upturns doesn't happen unless an end to the recession is imminent.

Why are so many getting this wrong?

...(I)ndicators are typically judged by their freshness, not their foresight. Because most market-moving numbers are coincident to short leading, while corporate guidance is often lagging, it's no surprise that analysts don't discern any convincing evidence of an economic upturn.

Regular readers know that we are long-time critics of looking to corporate guidance, a concurrent indicator.  The companies are reading the same newspapers as everyone else, and they have little current incentive to puff up expectations.

Please note:  The end of the recession does not necessarily mean imminent happy days.  There will be a period of below trend growth.  This means economic under performance and high unemployment.  Banerji specifically refutes the idea that high unemployment will derail the recovery.

Fed Balance Sheet.  Many are worried about the Fed balance sheet, a topic we recently covered.  Supporting the evidence that there is a definite "exit strategy" is the Atlanta Fed's Macroblog, one of our featured sources.  David Altig goes right to the Fed minutes to support his argument.  This is strong evidence for any objective observer.

Earnings are Surprisingly Solid.  Many critics observe that companies are beating expectations by controlling costs, not by growing revenue.  We expect the revenue growth comparisons to look very good in the latter part of the year.  The key economic losses came after the Lehman failure.  Meanwhile, companies that got lean and mean are poised to deliver good gains as fiscal and monetary stimulus has its full effect.  Employment will lag.

Remaining Problems

There are continuing issues in credit markets and housing.  As we wrote in April, there will be a "wall of worry".  For the individual investor, this means that progress will be gradual and grudging.  This summer is an important time to think about asset allocation, especially for long-term investors.

Most investors will get this wrong, trailing the market by an annualized rate of 6.5%.  Check out Toro's article, "You are Probably Bad at Investing" for some good evidence on this point.  It confirms every story we have seen over many years on this subject.