Today the Dow closed up 1.3%, the S&P 500 up 1.5%, and the Nasdaq up 1.1%, although this week marked a turn in market fortunes as the three indices were down quite a bit overall. After a 3 day battering, the traders of the world certainly viewed today as a "buy on the dips" opportunity. So the question remains: is this the start of a true correction based on fundamentals or has the decline been based more on fear? We here at Bishop tend to lean towards a combination of both, a bit of fundamental decline with a three day helping of fear to speed things along.
As we mentioned last week, our opinion is that we are approaching the end of the early macro economic cycle, so it is possible that the anticipated correction is upon us. If so, then today's buying will be the aberration and not the past three days of "correcting." We anticipate further gyrations as the markets continue to absorb news out of Europe and Korea. In reading the many writings put out today, we were a little surprised to see that many are now saying that the bear market will resume and that this is the beginning of more than a correction. None of these bears have said that we will approach our March 09 levels, but we have to wonder what will be driving this new bear market? Will it be softening US economic data? Will it be caused by the death of Spain, Portugal, and Italy?
We addressed the possible weakening US economic data some last week, and we see that as inevitable given our location in the economic cycle, and thus not necessarily a driver of a renewed bear market. While Euro area failure is a risk, certainly, we don't see it happening. The announced EU/IMF package addresses 77% of the debt of Greece, Spain, and Portugal, which are the three most likely candidates for trouble. Additionally, for the over-leveraged world governments, our own included, to bring about a crisis, there will need to be very steep fiscal tightening. We do not see the conditions for that developing any time soon as one major requirement for that is a sharp increase in demand for private sector credit. Since so many in the US and elsewhere are still essentially tightening their belts, we don't see a pick up in demand for private sector loans happening this year. Therefore, banks can continue to fund the various world governments.
Next week's data to watch are Tuesday's Housing Starts and Producer Price Index (watch for signs of deflation), Wednesday's Consumer Price Index, and of course Friday's Jobless Claims.
Have a great weekend!
Henry M. Kwiecinski
President and CCO
Bishop & Associates, Inc.