Last week’s post concluded with the statement: “The next week or two could go a long way toward determining the market’s direction for the summer.” Earlier in the post we indicated: “This week has not been pretty, but neither has it done any significant technical damage.” By contrast, this week’s negative market action has clearly done some significant technical damage and may well indicate that the summer price direction for stocks is likely down.
We described last week the S&P 500 having found support after its May and June declines at the 1040 level. Earlier this week all major equity indexes fell convincingly through 1040 or their equivalent levels. Prices ended the week at levels seen early last August, nearly a year ago.
The equity markets, down more than 8% over the past two weeks, remain seriously oversold on a short-term basis. That condition normally leads to at least a brief recovery rally, but buyers have so far remained conspicuously absent. Market analysts anticipate hefty corporate earnings gains to be reported over the next several weeks. Those expectations, however, have been so universal that it’s unlikely they will provide significant market support. Optimistic outlooks released in conjunction with quarterly earnings announcements may be needed to resurrect buying interest. Unfortunately the recent tendency has been for companies to ratchet down their optimism about prospects for the next few quarters.
Besides the technical damage to stocks this week, the equity markets also suffered from a spate of weak economic data. Reports came in below expectations on vehicle sales, pending home sales, domestic and Chinese manufacturing, consumer confidence and employment levels.
Jobless claims have stopped declining and have begun to rise. Average hourly earnings declined for the first time in seven years. Considering the number of unemployed whose jobs have been eliminated, plus those now unemployed for more than six months, this is currently the worst job market since the Great Depression of the 1930s.
New negative reports come out every week about the condition of state and local finances. The decline in municipal fortunes is forcing large numbers of layoffs, which look likely to grow even larger through the remainder of this year. This will continue to put downward pressure on consumer spending.
Market bulls have been strongly encouraged over most of the past year by improving manufacturing data, which resulted from a needed rebuilding of depleted inventories. Now that this has been largely accomplished, additional growth in business-to-business commerce will depend heavily on renewed spending by end consumers. We made the point several times over the past year that the economic recovery would be short-lived unless consumers came back with renewed vigor. We also thought such renewed vigor improbable given the highly leveraged consumer balance sheet. While the consumer has shed some of that debt, its level remains near historic highs. With unemployment likely to remain very high for several years and normal retirement age fast approaching for the Boomer generation, the consumer is apt to reduce spending and add to savings. Consumer conservatism does not bode well for a continued recovery.
Growing regulation and increased taxes are both likely in the year ahead, and each will tend to depress equity prices. For both technical and fundamental reasons, intermittent rallies notwithstanding, the path of least resistance for common stocks looks to be down.
Tom Feeney is the chief investment officer for Marathon Asset Management Co, a registered investment advisor with the Securities and Exchange Commission, and for Mission Management & Trust Co., a full service trust company regulated by the Arizona Department of Financial Institutions. If you would like to explore the management of an investment portfolio of $1 million or more by either of the firms, you are invited to email your interest to Tom@missiontrust.com or call (520) 529-2900 to speak with one of the Portfolio Coordinators.