Investing in stocks is never easy, but picking the right investment strategy after a volatile May seems pretty impossible. But never fear — if investors do their homework, they will see plenty of investment opportunities in June. Let’s do a quick five-minute drill on positives and negatives for the U.S. and global economy, courtesy of our friends at ISI Group in New York.
Here are the key positives
Durable goods orders, rail car loadings, hotel occupancy, apartment rentals and wages and salaries are all up, and credit card delinquencies are down. Consumer spending and nominal GDP in the first quarter also moved above their 2008 peaks, which means it is actually now expanding and not just recovering. It took 15 years for that to happen after the Great Depression in the 1930s, and Japan’s GDP is still below its 1997 peak. And Monday I noted that corporate profits in the first quarter were up 31% year over year, and durable goods orders in April alone were up 19% year over year. These are not the marks of an economy in distress.
Although developed countries’ fiscal policies are going to be biased toward tightening spending, central banks’ monetary policies will be tilted toward expanding. That combination is rare, but it’s probably benign to positive. These policies have been very positive for global trade rates, helping companies like CAI International (CAP), a major lessor and manager of the big metal boxes that are used by intermodal carriers like ocean shippers and truckers to transport freight. Its chart, above, shows it’s been one of the smoothest success stories of the recovery, barely missing a beat even last month when the rest of the market was creamed.
Now some key negatives:
Companies are becoming a little less optimistic about the future, unemployment claims are flattening (not falling), consumer spending is flattening, leading economic indicators are flattening, earnings revisions are flattening, DRAM prices are softening, mortgage applications are falling and home prices are not rising as much as they were earlier in the year. Junk bond spreads have moderately widened, bond issuance has fallen and stock markets are down.
ISI added it all up, ran the numbers through its regression models, and decided to reduce its 2010 GDP forecast for Europe to -1% from 0%. Main reason, as foreshadowed here Tuesday, is the storm of restrictive fiscal policies, such as Spain’s decision to cut wages and budget cuts in Italy and Germany. Moreover Spain has suspended all publicly founded construction projects not already 30% completed.
Bottom line: The global recovery is maturing. In Europe it’s a bit off track, but in the United States a very exciting and upbeat vibe has moderated a touch. This is a less than awesome but it’s not a disaster, so there is really no reason to expect all the gains of the past year to be erased.
Last comment from ISI: The company sends account executives around the world to explain its analysts’ point of view to fund managers, a process that includes group dinners, breakfasts and a maximum of schmoozing. I have met with them many times, and they are really the class of the business. One of their standard practices at a dinner is to ask each participant to provide a series of forecasts on future stock, commodity and bond pricing. ISI then adds up and averages them to get a sense of where the consensus and outlying opinions are.
The organization reported Monday that the range of views of investors surveyed last week was “massive.” The low best guess for the S&P 500 at the end of 2011 was 840 while the high was 1,500. Oil forecasts for Dec. 31, 2001, ranged from $40 to $100, and the 10-year yield from 2.5% to 5.5%. Their conclusion: “Massive uncertainty probably suggests markets could move significantly in either direction.”
Another way to put it is that bulls and bears are dug in, and not listening to each other, and that is why the volatility has been so incredible. There’s no compromising going on, just a big game of tug-of-war in which investors keep getting dragged from one side of a line to the other. My metrics suggest that the bears are winning at the moment, and will drag the markets lower.
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