Crossing Wall Street: Market Review
Despite a strong 2013, the stock market seems to be limping into the end of the year. On Thursday, the S&P 500 dipped down to its lowest level in nearly a month. The index has lost ground in eight of the last ten days, and we are on track for our worst weekly performance in the last 15 weeks.
Of course, since volatility is so low, the overall loss is not that much. This is a minor pullback at best. The S&P 500 is currently less than 1.8% below its all-time high close. That's right folks, we have dropped all the way back to those grim and hopeless days of early November. Naturally, some folks are already calling this the beginnings of a new bear market. Please: We are trading at less than 14.5 times next year's earnings, and estimates have been moving higher.
I want to look, now, at some encouraging economic signs. There is a very good chance that 2014 will be the strongest year for economic growth in quite some time. Will stocks follow? Well, that is another matter. Let's take a closer look at why the economy is looking up.
The Balance Sheet Recession Is Finally Over
One of the big turning points we have seen recently is that economic news has improved considerably. I still would not say that the economy is strong, but we are a lot better than where we were. The key is that many of the risks that plagued us have slowly melted away. Even our hopelessly dysfunctional Congress seems to have got its act together and reached a deal to avert yet another government shutdown. I have also been pleased to see things look better in Europe. It was the Euro crisis that weighed heavily on U.S. stocks in 2011 and 2012.
While a lot of people have been calling the stock market a bubble, I think we have witnessed very much the opposite. Namely, the tremendous fear bubble has deflated. It was only two years ago that the S&P 500 hit its lowest P/E Ratio in over two decades.
Another area where we can see the dissipation of fear is in the credit markets. Bond traders are paid to worry about things, and they are having a harder time of it. Bespoke Investment Group pointed out that high-yield spreads are at a six-year low, which is a clear sign of optimism. When lenders are afraid, they pull back, and when credit markets freeze up, the whole economy is in trouble. That is not what is going on right now.
Things are also looking good for consumers. David Rosenberg, who has been a long-time bear, has defected to Camp Bull. He noted that the Fed's recent Beige Book referred to wage pressures 26 times.
Folks are also hitting the stores. Retail sales for November rose 0.7%, and the October figure was revised upward to 0.6%.
Consumers have also been getting their finances in order. Cullen Roche, who is one of the most astute writers on the economy today, recently declared an end to the "balance sheet recession." For the first time in several years, households are adding on debt. I realize that may sound like something bad, but in econo-speak, it is actually good news. More household debt is what needs to happen during an expansion. The long trend of paying down debt was a necessary and painful obstacle for the economy. It has come to an end.
Even Uncle Sam's finances are getting better. The U.S. budget deficit, while still massive, is much less massive than it was a few years ago. The deficit for this year will probably be about 3% of GDP, which is down from 10% in 2009. Also, cost-cutting at the local government level (what some people call "austerity") is largely over.
I have also noted that the spread between the 2- and 10-year Treasuries is widening, which is a classic forward-looking indicator for the economy. In fact, it is one of the most reliable macro indicators around. What is particularly interesting is that the yield on the two-year has been fairly stable, while the 10-year has been rising. The 2-10 spread is near the highest it has been in more than two years.
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