ONE YEAR AFTER, David Kelly, Chief Market Strategist, JPMorgan Funds
This week marks the one-year anniversary of the stock market low and plenty of airtime and newsprint will be devoted to the impressive rally in the market since then. However, it is impossible to look at the economic numbers without reflecting on how far the economy and markets still have to travel before returning to normal.
A barrage of numbers on the job market last week confirm that we are essentially at the end of payroll job losses. However, with U.S. payroll employment now down more than 8.4 million jobs in the last 26 months it will take many years to get back to pre-recession employment levels, even in a best-case scenario.
Numbers due out this week should tell a similar tale. Initial unemployment claims have been coming down in recent months but are still running at more than 450,000 per week, compared to the 320,000 per week average seen from 2005 to 2007.
U.S. exports are likely to have risen for the ninth consecutive month in January but they still remain about 12% below their peak in the summer of 2008, while imports are 20% below their July 2008 peak.
Thursday will also see the release of quarterly flow of funds statistics with household net worth likely rising by over $1 trillion to $54.5 trillion in the fourth quarter of last year. However, while this would be up about $6 trillion from its 2009 first quarter low, it would still mean that households have only recovered one third of the $18 trillion decline in net worth produced by the crashes in the real estate and equity markets.
Finally, as of this morning, although the S&P500 is up 68% from its March 9th, 2009 low, it still needs a gain of 37% just to get back to its peak of October 2007.
However, while all of these distances are long, the economy does appear to have the potential to get most of these numbers back to their old highs over the next few years. If this transpires, the next few anniversaries of March 9th 2009, like the first one, should provide many happy returns for investors in U.S. stocks.
BETTER TIMES, From Bob Doll, vice chairman and chief equity strategist for fundamental equities, BlackRock
Last week was a strong one for risk assets, and for equities in particular, with the broad US averages entering positive territory for the first time since early January. The Dow Jones Industrial Average gained 2.3% to close the week at 10,566, the S&P 500 Index advanced 3.1% to 1,139 and the Nasdaq Composite climbed 3.9% to 2,326. All sectors were positive, with the materials area up the most at 6%.
Friday brought the release of perhaps the most waited-for economic statistic, the employment report, which showed less than 36,000 jobs were lost in February. While the average work week fell, clearly tied to weather-related troubles in parts of the nation, the overall report was better than most people expected given the severe weather, with several signs that the job market will soon start to post good news. Globally, numerous countries are already reporting positive job growth. We would argue that the second quarter could bring as many as 300,000 new jobs given that the average work week, temporary hiring, productivity and profits—four leading indicators of job growth—have all moved up.
Continuing with the good news, a profits-led recovery appears to be unfolding, which will lead to increases in capital expenditures and, eventually, in employment. In addition, credit markets in general have improved significantly, global short rates are still at lows, yield curves remain fairly steep, and parts of the world, notably emerging market economies, are growing rather nicely. The threats to the more optimistic view include premature policy tightening, unfinished deleveraging and protectionism. That said, the past few weeks have provided a number of signals that the major central banks recognize economic vulnerabilities and falling core inflation and, thus, are likely to remain on hold.
March 2009 marked the primary low for this bear market. We are a year past that now and, barring a significant double dip in the economy, the odds point to 2010 as a positive year for equities and other risk assets. Some argue that the recovery process is artificial, mainly reflecting the impact of government intervention, and that the economy’s day of reckoning will come as stimulus is withdrawn. Skepticism about the durability of a recovery is common following recessions, especially after a severe one, but recent history suggests that the world economy almost always adapts and returns to growth. Minus any significant negative external shocks, we believe this recovery should follow suit.
MIDCAPS ARE DUE TO OUTPERFORM, From Ridgeworth Investments
The current equity market is beginning to exhibit some familiar patterns relative to past recessions – notably the 1980, 1982, 1990 and 2001 recessions. Looking back on these four recent recessions, bear markets, on average, have bottomed four months prior to the official end of the recession. Another familiar pattern has been the performance of mid-caps relative to large caps (represented by the S&P 500) around the market bottom. As the market approaches the bottom, mid-caps have tended to underperform large caps, but once the recession end is established, mid-caps have progressively outperformed large caps as the economy recovers. This suggests that mid-cap stocks tend to underperform large caps when investor fear and risk aversion are rising, but steadily outperform as investors’ regain confidence in the market.
The CBOE Volatility Index (VIX) is a measure of expected volatility. Often referred to as the “investor fear gauge,” the VIX is a forward-looking metric that uses S&P 500 Index options to indicate the market’s expectation of 30-day volatility. A measure of less than 20 reflects expectations of relatively low volatility, while higher than 30 indicates relatively high volatility. There has been an inverse relationship between mid-caps (relative to mega caps) and volatility. When volatility spikes, the ratio between mid-caps and mega caps declines, as mega caps outperform mid-caps. As volatility recedes, the ratio increases, indicating that mid-caps outperform mega caps.
The volatility spikes occurring during the 1990s recession coincided with a period of mid-cap underperformance. During the last expansionary period, volatility measures fell below 20 and mid-caps enjoyed a period of escalating outperformance. In late 2008, expectations of volatility spiked to 80, corresponding with a brief period of underperformance for mid-caps, but when expected volatility decreased mid-caps began outperforming again.
The opposite relationship has generally been true when comparing mid-caps to small caps. When expected volatility was rising, mid-caps usually outperformed small caps. Immediately after periods of high volatility, small caps have outperformed mid-caps. In 2008, the relationship broke down for a brief period after Lehman declared bankruptcy and volatility soared. Some believe that the environment drove many mid-cap investors out of the market, negatively impacting performance while speculators dampened the negative impact on small caps.
REPORTS CALENDAR
Monday, March 8:
Corporate Earnings: RiVo, H&R Block
Tuesday, March 9:
ICSC-Golman retail sales index (weekly)
Corporate Earnings: J. Crew, Kroger
Wednesday, March 10:
Mortgage applications (weekly), Wholesale Trade (January)
Corporate Earnings: Navistar
Thursday, March 11:
International balance of trade (January), Jobless claims (weekly), Census Quarterly Services Survey (Fourth Q ’09)
Corporate Earnings: Smithfield Foods
Friday, March 12:
Retail Sales (February), Reuters/University of Michigan Consumer Sentiment Survey (March), Business Inventories (January)
Corporate Earnings: Ann Taylor Stores
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