Everyday I find myself looking for signs of a recovery in humdrum details like the weekend lines at the upscale eatery in my neighborhood or the endless flow of taxis racing across my busy block at rush hour. Few are empty and I silently cheer.
Apparently, stock market investors are no different. Since March 9, the S&P 500 has surged 20% — although it still managed to drop 10% in the first quarter. Tuesday the index tacked on another 1.7%. The explanation for these extraordinary gains is nearly identical in every news outlet: A handful of recent reports in housing and manufacturing “topped economists’ estimates, bolstering optimism that the worst of the recession is over.”( Bloomberg )
But the explanation could just as easily have been investors have simply decided the glass is no longer half empty but half full. Treasury has a recovery plan. The February economic data didn’t worsen.
But it would be equally true to say the data point to a long, hard slog ahead. Global output is expected to decline by as much as 2.75% in 2009, the Wall Street Journal reported on the eve of the G-20 economic summit. That’s the first global pullback since World War II. In our own backyard, T/S contributor Austin Consindine writes a pretty alarming post about the trend in foreclosures. ADP Employer Services announced that March job losses in the private sector were a hefty 742,000, more than expected and the most since 2001. And then there’s that bankruptcy threat at GM and Chrysler, which could throw a real wrench into the manufacturing and employment numbers.
But even as policymakers and Wall Street insiders struggle to overhaul the system into something new, some things don’t change — like investors rooting for a bottom. This powerful rally? A leading indicator of good things to come. Weak hiring numbers? A lagging indicator. Classic Wall Street wisdom. The question I ask: Will they hold true this time round?
This recession is singular — entering its 17th month, it is longer than any since the Great Depression. Weakness in the banking system is slowing the recovery process.
Markets seemed particularly pumped last week in the wake of two economic reports. The first: February durable goods, which the Census Bureau reported had gained an unexpected 3.4%. Second: February new home sales surged 4.7%. The numbers surprised. Almost too good to be true.
Indeed, Merrill Lynch economist David Rosenberg explains that the numbers were too good to be true. Apparently the unseasonably warm February induced the numbers crunchers in Washington to push awfully hard on their so-called seasonal adjustments. “ML [Merrill Lynch] calculates that if a typical February adjustment factor had been used, orders would have shown a 5% collapse last month[February].”
If you’re not in the mood to question the half-full glass for stocks, don’t read Rosenberg’s revised earnings outlook for the S&P: According to The Big Picture blog, Rosenberg has lowered his number to $40, about one-third lower than the consensus $63. The diminished earnings outlook makes the S&P index at 811 suddenly look pretty expensive, with a price about 20 times greater than earnings (P/E). If you expect the more robust earnings of $63, the index may seem a bargain at a mere 13 times earnings. The Big Picture takes note that Rosenberg is the rare economist who has been spot on in his predictions during the recession; he has dubbed the recent market surge a classic bear market rally. “… during each of the past few bear market rallies, financials led the bounce, followed by consumer discretionary stocks and materials names. During the March rally, we have the exact same leaders in the exact same order, so the current rally certainly seems to be reading from the bear market script as opposed to the brand new bull market one.”
Not much has changed on Wall Street, even now. The urge to see stocks rise appears to be racing past all reason. Seems we can’t help it — as T/S contributor Ryan Sager notes: We are hard-wired to prefer inflation. There’s even a name for the phenomenon: “the money illusion.”
The money illusion: Wall Street investors seem to have it big time. I, too, am still looking for signs of a recovery. But the Cassandras still bear watching.