Inside Signature Update
- A Market Cycle or Economic Reset?
- Housing Reports and Inventory Considerations
A Market Cycle or Economic Reset?
Over the last 18 months most investors have weighed the virtues of ‘bull’ and ‘bear’ markets with an eye toward the end of one and the beginning of another - in keeping with the market and economic cycles we’ve come to expect. Market analysts and economists, myself included, have compared current trends with those observed over the last 100 years or more, applied time-tested theorems, and have routinely suggested possible outcomes and directions. In many cases, we’ve offered opinions and forecasts of what ‘must surely come’. While our observations seem well founded and our forecasts may be technically sound, it has become increasingly difficult to envision future trends based on historical outcomes and contemporary guidance.The recent rally in the equities markets, now in its third week and approaching a 25% increase in broad-market stock values, has been welcome to say the least but may not represent what many investors are hoping for. It likely is the precursor to a long-term ‘bull market’ run-up and predictably is emerging some six months or more before real, measurable economic growth, but it may not be the long awaited ‘bull’ market itself. We may need to see a retrenchment back towards 7,000 on the DOW before a sustainable rally gains strong footing; a ‘W’ shaped bottoming and rebound as is often the case.
With 1st Quarter 2009 earnings reports due out soon, a quick retracing of the recent increase could follow. Added to the earnings scenario is the possibility that a number of major banks, now posting meaningful profits, may very quickly repay their TARP loans to the US Treasury. If this occurs, then it will increase the de-leveraging of our economy and could slow the pace of a market recovery.
On the other hand, there are many respected market economists, who believe we’re seeing a ‘V’ shaped market recovery as opposed to the ‘W’ described previously. Brian Wesbury, Chief Economist for Chicago based First Trust, is unabashedly optimistic and appears confident that the recent rally is the start of a long ‘bull’ rally – he might be right. If 1st Quarter earnings reports are better than expected, or if the banks that are talking about repaying TARP funds are only doing so to send a much needed message to the US House and Senate, then it is possible that we may now be two or more weeks into the next ‘bull’ market. Only time will tell.
Over the last many months, what have appeared to be market bottoms in housing, debt, equities, and commodities have sometimes been resting points. In some cases, events which would normally be met with negative reactions have created upward momentum and vice versa. And too often, the most fundamentally sound principals have proven insufficient while dealing with current events and determining effective strategies. We expect some of this in any market, but the maelstrom of uncertainty and the shifting attitudes and expectations experienced in 2008 and 2009 to date have gained enough weight that they beg the question: Are we experiencing a market cycle or have we gone through an economic reset?
We all understand market cycles, or at least most of us suppose we do. Cycles often help create opportunity for some and uncover problems for others, within the framework of a set of expectations driven by experience and observation. But what happens when a fundamental shift occurs where attitudes and expectations change in such a way as to create a new market paradigm? Our economy and markets reset and, though this may be counter-intuitive, such resets can build great strength and offer unexpected opportunity.
We’ve seen several resets throughout our domestic history, often brought about by calamitous or opportunistic events such as the California Gold Rush, the Civil War, The Great Depression, World War II, the Civil Rights Movement, and the Internet Age in which we currently live. While these events may not all have been troublesome, they each represent water-shed moments on modern US history. Each time, attitudes and expectations have been inalterably changed and have set the stage for meaningful social and economic growth.
Recognizing our current condition as a ‘reset’ doesn’t mean that we can’t expect economic recovery and market rebounds in the coming months and years, but it does mean that the foundations of those gains may be different. For example, the credit crisis through which we’ve just passed has changed the way our business and consumer society views debt and leverage. As such, we should expect that borrowing will play less of a role in future economic expansion and economic growth at lower levels of leverage is more stable, less brittle, and offers a more solid foundation for future innovation.
We’ve spent the last nine months in the midst of a shift from an economy of net-spenders to one of net-savers, and we appear to be closing in on a sustainable net-savings rate of 2-4% (this figure does not include corporate retirement accounts or increases in homeowner equity). Likewise, our institutions of higher education are experiencing a surge in enrollment not seen since the end of the Vietnam War. At the same time, we appear to finally be willing to adjust our expectations regarding sustainable energy sources and to adopt ‘greener’ energy consumption and utilization practices. These very elements, more prudent spending and debt practices, increased levels of education, and greater energy-efficiency expectations, may be the foundation for more competitive domestic businesses and could support the innovation and technology needed to allow us to once again position American as the indisputable leader in global business.
Previously we’ve discussed the possible shape of the coming economic recovery; and while it’s too early to offer an opinion with any certainty, what we may be able to do is see the color of our long-term recovery – green. Green as in more energy efficient… green as in more profitable… green as in more responsible… and green as in more sustainable. I’m actually starting to like the color green.
Housing Reports and Inventory Considerations
Some portion of the recent improvement in the US stock market can be attributed to the recent reports of improved housing figures. Without wanting to take away from the real improvements the real estate market has made in the last month, we can’t expect that figures from January (historically the worst month of the year for housing) to February equate to a trend and signal that fiscal health has been restored to our troubled market – this would be a little like standing in front of a banner proclaiming ‘Mission Accomplished’. It’s just not that easy.
Here are some facts to consider:
- The recent housing sales figures, though better than January are still the second worst in recent
history – that also tells us a lot about January.
- A stable residential real estate market depends on an existing housing inventory of 5-6 months;
our current inventory level is more like 9.5 months.
- With over 1,000,000 excess homes in inventory it will likely take until 4th Quarter 2009 or 1st
Quarter 2010 to reduce inventory to stable levels.
CNBC’s Jim ‘Mad Man’ Cramer has long suggested that June 2009 will mark the bottom of the US housing market; and though we don’t always agree with Cramer or appreciate his theatrics, he appears to be pretty close on this one as real estate price stabilization could finally occur in the late 2nd Quarter 2009 to the mid 3rd Quarter. Recent residential loan applications reflect an ongoing mortgage boom due to historically low interest rates that continues to be dominated by the refinance market. Longer term, most mortgage specialists expect refinance opportunities to decrease dramatically while ongoing activity in the mortgage markets will be forced to depend on lower loan-to-value, new purchase loans on more reasonably priced homes.
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