Divergent Stock Market Performance

US equity markets continue to grind higher.  The S&P 500 Index is currently over 23% higher than it was this time last year and new recovery highs seem to be established almost every other trading session.

But the recent strength in US stocks has not been matched by other markets. The charts below show the performance of several major indices over the past year.  As you can see, the S&P 500 Index is trading at a yearly high .  All other markets, however, are trading well below their highest level over the past year.

I haven't looked into what this divergence in performance may for future stock price direction. But it's interesting, isn't it?

Enjoy.

Wall Street vs Main Street

Do you keep hearing about the disconnect between Wall Street and Main Street?  Well, the chart below does a nice job of quantifying this disconnect.

The blue line is the S&P 500 Index (Wall Street) and the green line is the Consumer Confidence Present Situations Index (Main Street) which measures overall consumer sentiments toward the present economic situation.

Over the past 20 years the two time series have displayed a high degree of co-movement.  However, since March 2009 an interesting and unusual divergence has occurred. The S&P 500 Index has rallied by over 50% since the March 2009 bottom whereas consumer confidence has remained at historic low levels.

Why the disconnect?  Well, I think stock markets and asset prices in general have been buoyed by the Fed's quantitative easing activities (see this previous post on the relationship between the Fed's Treasury purchasing program and the S&P 500 Index).  However, Main Street continues to experience high unemployment and a depressed housing market.

But whatever the reasons for the disconnect the more important question is what comes next?  If the S&P 500 Index continues to rise can we expect a rebound in consumer confidence?  If consumer confidence remains low or falls further will this drag the S&P 500 Index down?  Or is the relationship between stocks and consumer sentiment broken?

My hunch it that the current disconnect between Wall Street and Main Street will continue. I'm not expecting some stellar rebound in consumer confidence or a market collapse.  But in the longer run something will have to give.

Enjoy.

Looking Behind the US Unemployment Figures

As you've probably heard by now the unemployment rate in the US dropped from 9.8% to 9.4% in December.  That's the biggest single month drop in twelve years and lowest unemployment level since May 2009.   President Obama was quick to highlight this figure to the US public as proof that the economy was recovering.  "The trend is clear" he said.

Well, the US economy may well be improving but trends are rarely so clear.  The problem is that headline figures, such as the unemployment rate, almost never tell the whole story. 

For example, it's true that the US labour force did grow by 103,000 jobs in December.  However, industry analysts were expecting a rise of 150,000 jobs and for the unemployment rate to drop 0.1% to 9.7%. So how did the US economy add fewer jobs than expected but the unemployment rate fall so dramatically?

Time for a chart courtesy of the Calculated Risk blog:

The red line shows the headline unemployment rate.  As you can see, the rate has begun to fall from its recent highs.  However, the other two lines are revealing.  The blue line is the participation rate. This is the percentage of working age persons that are in the labour force. The black line is the ratio of ratio of employment to the US population.

Both the participation rate and employment to population ratio are at levels not seen in over 25 years.  In December alone 260,000 people dropped out of the labour force.  These are the long-term unemployed who have essentially given up looking for work. These people are no longer included in the unemployment figures.

And when so many people leave the labour force the headline unemployment figure gets skewed. In this instance the fall in unemployed was exaggerated due to the large decline in the participation rate. 

In this light the unemployment figure don't seem so good.  And consider this. The US economy must add about 125,000 jobs each month just to keep up with normal population growth. 

Or how about this: it will take about 175,000 new jobs to be created each month over the next five years just to make up for the ones that have been lost during this recession.

We can all be glad that the US economy is now growing and adding jobs.  But if there's one thing that is clear it's that the pace of recovery is very sluggish. That's not the upbeat media soundbite that Obama is looking for,  but it is the truth.   

Enjoy.

US Stock Sentiment is Extremely Bullish

Here's an interesting chart I came across on the Bespoke Investment Group blog.  It shows the combined bullish sentiment measures of the American Association of Individual Investors and the Investors Intelligence surveys.

The current bullish sentiment towards stocks in the US has only been higher on eight occasions since 1987.

In order to see how this relates to the stock market below I've overlayed the S&P 500 Index on the same chart.

As you can see, some previous extreme bullish sentiment levels have corresponded with significant market highs (1987, 2000, 2007).   However, other extreme readings have merely been followed by a temporary pause or mild pull pack in stock prices.

So what can we expect to follow this current extreme in bullish sentiment? Well, any significant decline in the market will have to overcome some serious headwinds.  We're in the midst of the Santa Claus rally, then there's the combined January effect and 3rd year of the Presidential cycle coming up.  And let's not forget the Fed's continuing POMO activities which appear to be bullish for stock prices.

Of course, on the negative side there's the ongoing debt crisis in Europe.  That alone has the potential to derail the stock market. And as I've pointed out in a previous post, the fact that bond yields are rising pretty much across the board could be an early warning sign of trouble ahead.

My best guess would be that we're in for a temporary pause in the US stock market advance over the next few months.  That will enable the current extreme bullish sentiment to be worked off.  But in these unusual economic times I wouldn't rule out the market's potentail to deal up a big surprise either.

Enjoy.

US Unemployment: A Reason to be Optimistic

Any improvement in the global economic situation will almost certainly correspond with an improvement in the economic conditions in the US.  The US is still the biggest economy in the world and the eyes of all other countries, including the Gulf region, will be watching for signs of a turnaround in the American economy.

And there's little chance of any meaningful or sustained recovery in the US without a significant improvement in two areas: employment and housing. 

Well, I came across some interesting charts on Don Fishback's blog that hint at better times ahead for US employment. 

The first chart below shows the US employment rate (blue line) along with NFIB "Poor Sales" (red line).  As you can see the two series are highly correlated. Members of the NFIB are made up of small businesses. In the past, when there has been a high number of NFIB members that have rated their sales as "poor" this has tended to correspond with high unemployment periods. Conversely, low unemployment periods have tended to correspond with a low number of NFIB members that rated their sales as poor.

In short, unemployment in the US is closely correlated to the level of small business sales. Makes sense.

At present the level of unemployment and number of small businesses rating their sales as "poor" are both at historically high levels.  However, recently the NFIB "Poor Sales" level has begun to fall from the highs set about a year ago. 

The next chart below shows the NFIB Optimism Index which is a measure of small business sentiment in the US.  Although still low in a historical sense the level of small business optimism has risen significantly since the 2009 bottom and has just posted its fourth consecutive monthly gain.

What do the two charts above mean for US unemployment: Here Don Fishback:

Here’s the bottom line.  If small businesses are optimistic for a reason … if sales really are starting to pick up and become less poor … then we might actually see improvement in the unemployment rate.

And if the unemployment rate does fall that's a big win for the US economy and the rest of the world.

Enjoy.

A Quick Look at the US Employment Situation

Below is a chart (via Calculated Risk blog) comparing all post WWII employment recessions in the US.

The current employment recession (red line) stands out in both its severity and duration.  The number of jobs lost (about -6% from the peak employment rate at the lowest point) is greater than any post WWII employment decline.  And if that wasn't bad enough the current employment recession has already lasted longer than all but one other post WWII employment decline (and is on track to be longer than that one as well).

[ click to enlarge ]

And all of this is despite the truly massive amounts of money the Fed has been throwing at the US economy over the past two years (in an interview this weekend Ben Bernake said unemployment could have reached 25% withouut the US Central Bank's intervention).

The point here is that the current employment situation in the US and, for that matter, the wider economic situation doesn't conform to a typical post WWII slowdown.  Beware of analysis and economic predictions that assumes we are.

Enjoy.

What's On My Financial Radar

GCC Market Analytics is primarily focused on Gulf equity markets.  Occasionally, however, it's a good idea to take a broader look at what's happening in the world.  Below are some of the things that have appeared on my financial radar over the past week or so.

1.) Foreclosure Mess in the US

You know something's serious when a new term is coined to refer to it: Fraudclosure.  The emerging mortgage foreclosure debacle in the U.S. has the potential to get very bad, very quickly.  If you're not yet familiar with this subject I suggest you read this primer.

If there is a significant slowdown in the foreclosure process (Bank of America has already halted foreclosures in all fifty states) then that's bad news for the housing market, bank revenues and potentially their bottom lines.

However, it gets worse.  Other issues connected to the foreclosure problem are also emerging.  For example, check out this Felix Salmon article.  Should anything close to this come about 2011 could see these part two of the subprime crisis.

2.) QE2

Ben Bernake looks set to crank up his money printing machine again.  The big question, however, is how much money will be printed.  This article makes the case that consensus market expectations on the size of QE2 may be far higher that what the Fed is actually planning. 

If consensus expectations are currently being priced into the markets and the Fed action falls short of them then QE2 may not be the big party that everyone is hoping for.

3.)  Sliding US Dollar

Down 13% since the June high, it looks like the prospect of QE2 is being priced into the US Dollar as well.  However, should QE2 not meet expectations this fall may prove to be overdone, at least in the short-term.

There's a lot ot talk about competitive devaluation and the possibility of a currency war (see here for example).   A sliding dollar may beneficial to the US but it's at the expense of someone else's share of world trade.

4.)  China now in a bull market (again)

Better news for China equities.  After falling 30% following the market top in July 2009 the Shanghai Composite Index has now rebounded by 25%.  That's bull market territory.

Enjoy.