Market Commentary – June 29, 2009

Q2 comes to an end this week – Q3 begins . . . here are some seasonal points to keep in mind. The 4th of July holiday week is typically very quiet as vacations kick in – (I will be away from June 30 to July 7). There is usually quarter end “window dressing” by institutions that will likely close the quarter on an upward note. Q3 is the weakest quarter of the year and given the huge gains in Q2 2009’s Q3 should be no exception. Portfolios are often rebalanced following the first half of the year as retirement fund contributions flow in during July. Since retirement funds are too heavily invested in cash and bonds the rebalancing this quarter should give us a boost in equity purchases. This year’s Q2 earnings season will show sequential gains and begin to include improving earnings guidance as the signals of economic recovery translate into management and analyst outlooks.

The weekly leading economic indicators from ECRI are booming. We are in the midst of the strongest rebound in their recorded history since 1967. So far this tool is showing quite an impressive “V” shaped recovery.

ScreenHunter_04 Jun. 30 10.47
We are witnessing the strongest one month improvement since the 1992 recovery and the strongest 6 month improvement since the 1983 recovery. The point to keep in mind is sharp improvements in the ECRI have led sustained equity bull markets. The only thing that is standing in the way of the upside is bad government economic policy (i.e. raise taxes) which unfortunately is in ample supply at the moment.

Mark Perry’s Carpe Diem blog once again highlighted additional evidence of the economic recovery taking root. The signal is now coming from consumer sentiment.

Carpe Diem Chart
Carpe Diem Chart

LA TIMESConfidence among U.S. consumers rose this month for a fourth straight time, reflecting signs that the worst of the recession has passed. The Reuters/University of Michigan final index of consumer sentiment gained to 70.8, the highest level since February 2008, from 68.7 in May.

Recent reports show some areas of the economy, such as housing and manufacturing, are seeing a smaller pace of decline, consistent with the Federal Reserve’s projection this week that the slump is “slowing.” Government data today indicated that efforts to revive the economy are allowing consumers to spend even with unemployment at a 25-year high. The data also showed savings surged to the highest level since 1993.

MP: The last time the Michigan consumer sentiment index increased in four consecutive months was the period from October 2001 to January 2002, which signaled the end of the 2001 recession (see shaded area in chart above). The four-month cumulative increase of 14.5 points in consumer sentiment from March to June 2009 (see shaded area in chart) is even greater than the 11.2 point increase in late 2001-early 2002.

The data is compounding. The fact that the economy is recovering should be undisputed. You want to be allocated to equity as economic recovery becomes sustained. Earnings growth is highest as companies compare with the bottom of the cycle – that will be Q3, Q4 and Q1 of 2010. This fact will mitigate the seasonal drag on Q3 mentioned above. Q4 has the potential of being one of the best quarters in years. You will want to be fully invested before the earnings outlooks for Q4 are broadly assimilated. You will also want to maximize capital gains and minimize ordinary income given the emerging signs of increased income taxation. Owning stocks helps accomplish this earnings goal.