In my August 5 post “The Tide May Have Turned,” I listed several technical breakdowns and conditions that strongly suggested that a top for the 26 month stock market rally had been established. Nothing in the subsequent two weeks of market action would lead to a contrary conclusion. Despite two days with gains of more than 400 Dow points, that index lost a total of 626 points or 5.5% since the August 5 article.
Negative as the technical conditions may appear, the fundamentals look even worse. This week produced a deluge of disappointing economic statistics. Along with continuing dismal news on housing and unemployment, the Philly Fed Business Outlook Survey collapsed to a level that has accompanied each of the last seven U.S. recessions going back more than four decades with no false indications.
Remarkably, almost no economists are forecasting another recession. Most are admitting, however, that, while still unlikely, the odds of recession are increasing. While Cheerleader-in-Chief Ben Bernanke admits that the economy will remain sufficiently weak to justify short-term interest rates at zero through mid-2013, he doesn’t anticipate a fall into recession. And portfolio managers, the majority nearly fully invested, remain bullish by a two-to-one ratio. Optimism remains high despite, according to Bloomberg, nineteen major world stock markets down by more than 20% from their 2011 highs. Most U.S. stocks are also down by more than 20% from their highs, although the most commonly watched indexes are just short of that mark.
Somewhat under the radar, but perhaps an even more important forecaster, long government bond yields have plummeted not just in the United States but worldwide. So pronounced is the flight to safety that investors are willing to lend massive sums of money to the governments of the United States, Canada, Germany and Great Britain for ten years at scarcely above 2%. At the short end of the curve, huge amounts of money are being given to the United States government for three months for the princely annual return of one one-hundredth of 1%. Notwithstanding the bullish public comments of government officials and investment professionals, investors are afraid that more adventurous investments will lose money.
We go into the weekend with much conjecture about actions that may be taken by the Japanese central bank, the ECB or European governments. Next week we hear from Chairman Bernanke in Jackson Hole, where he announced QE2 last year at this time. Great hope abounds on Wall Street that the Chairman has another rabbit in his hat. Yesterday former Fed Vice Chair Alan Blinder suggested that there was a “reasonably high” chance of new stimulus. Of the Fed’s options, Blinder thought QE3 to be the most likely. Later in the day, renowned investment manager Barton Biggs indicated that he believed QE2 worked and that we need a QE3. (Apparently QE2 didn’t work well enough.) “We do need more out of the Fed,” he said. And this morning a trader on financial TV implored, “The Fed has to come to the rescue again.”
What an economy, when the main hope is government intervention!