End of the Bear's Grip?
By Gus Krafve
May 7th, 2009
The current stock market rally has been extraordinary. The S&P 500 is up 28.5% from March 9 to April 30. As we have written in Market Insights and discussed with several of our clients, the more violent the market decline, the more robust the recovery.
We have continued to see negative GDP data and unemployment is still on the rise. So what was the catalyst to this current rally? It appears to have occurred on the back of Citigroup’s comments on March 10 and J.P. Morgan’s comments on March 11. Both banks announced they had turned a profit for 2009. Another catalyst has been a slew of earnings surprises. Almost 75% of the S&P 500 companies have reported positive earnings, with 64% of them beating analyst expectations and 8% matching expectations.
One of the major issues facing this market is the severe lack of confidence of the US consumer. Our case has been that when confidence turns higher, consumers will spend more and thus, the economy will improve. We may have just seen our first glimpse of a turn in consumer confidence. One of the most widely followed measures of consumer confidence is the monthly survey conducted by the University of Michigan. This survey’s results for the month of April came in at a reading of 65.1. This number is still low historically, but is the highest reading we have seen since September and is up significantly from the March reading of 57.3. The stock market has historically bottomed when consumer confidence is extremely pessimistic.
Finally, let’s look at another source of recent positive data, which is the housing market. Home buyers have been taking advantage of sub-five percent mortgage rates, bargain prices, and an $8,000 tax credit for first time buyers. Seasonally adjusted pending home sales in March were up 3.2% and may be an early indication that the housing market is bottoming. Houses in most regions of the US are more affordable than they have been in over 20 years, as measured by the housing affordability index. New home inventory has been declining rapidly and currently stands at just over 300,000 units which is a level that has not been seen since 2002. Existing home inventories have also been on the decline, down 10% year-over-year, even in the face of a continuing wave of foreclosures. Also, the S&P Homebuilders Index is up nearly 100% since March 9, a sign that better days may lie ahead for companies in the homebuilding related industry.
I was quoted in the April 27, 2009, issue of Barron’s Magazine in response to their cover story, “Is this Bull Run for Real?” Of the 100 money managers who responded to Barron’s bi-annual survey, 60% were bullish and only 13% were bearish. Like the majority of my colleagues, I am bullish for the prospects of the market over the next year. It is starting to look and feel like we are turning the corner on several fronts. That being said, I don’t think it will be smooth sailing, and we will still likely have some significant turbulence along the way.
