Is the Economy Slowing Down? (cat, ibm)
Nearly a month ago, after the last Fed meeting, we started to discuss the likelihood that the U.S. economic recovery was slowing down. After all, the Fed had just lowered its GDP forecast for 2011 and acknowledged that inflation was picking up as a result of QE2.
The S&P 500 was above 1,360 at the time.
Today, the S&P 500 is struggling to hold support at 1,320. Commodity prices have dropped sharply. And investors are positioning for both slowing growth and the end of QE2.
I've been suggesting that the end of QE2 might push the U.S. Dollar and Treasury prices higher as investors exit the "risk on" trade encouraged by QE2. Recent activity in the dollar, bonds and the stock market support this shift in risk.
But how strong should we expect the U.S. dollar to get? How far will Treasuries rise? And what does that mean for commodities?
*****We should start with an observation about investing and what happens when money rotates from one sector/asset to another. Prices rise when there is buying pressure. So when we see Treasury prices rise, we can conclude that investors are buying.
But that doesn't mean that investors will continue to buy and Treasury prices will continue to rise. In other words, it is far too early to say that Treasury prices are in a new bull market.
Likewise, the sell-off for the stock market we've seen should not be seen as the start of a new bear market.
Could stocks head lower? Of course. The S&P 500 could test support levels at 1,301 and even the March lows of 1,250. But let's not forget that the S&P 500 is not overvalued based on earnings estimates (nor is it undervalued). Investors certainly haven't gone ga-ga for stocks, even though we've some bubble-like behavior in some commodity and tech stocks.
No, I'd say that the post-traumatic stress syndrome from the financial crisis is alive and well. And that has acted to keep stock prices in somewhat rational territory.
*****The biggest catalyst for the economy, stock market, commodity market and bond market has been the U.S. dollar. U.S. multinational companies from Caterpillar (NYSE:CAT) to IBM (NYSE:IBM) have enjoyed a surge in revenues and profits from overseas.
The weak dollar has been reflected in higher commodity prices. And investors who have ridden that trend have made some good money.
However, it's not correct to say that the only catalyst for commodities is the dollar. Emerging market demand, and even weather related shortages, are also playing an important role.
And so, we watch the inflation issues in China, India and elsewhere closely.
*****The European debt situation is a bit of a wild card in the whole equation. That's because, as the world's second most important currency, the euro has a big impact on the dollar.
And so, we watch the situation with Greece closely.
A Greek debt restructuring would be a bad thing. As we discussed on Monday, Greek restructuring would affect Tier 1 capital ratios at important European banks and likely set off a selling cascade.
While we should expect that there is strong motivation to find an alternative and prevent Greek restructuring, there's no doubt that it is on the table and some investors are positioning for it.
*****If all this sounds like there's a lot of uncertainty swirling about, you're right, there is. And as we know, the stock market does not like uncertainty.
We've seen a rotation into defensive stocks like consumer staples and healthcare/biotech lately. Stocks in both of these sectors are considered defensive because they do not depend on discretionary spending to grow.
In fact, one healthcare stock I just recommended to my Top Stock Insights members is up better than 10% in three days. And my price target calls for minimum of 30% gains from current levels.
This stock is a leader in helping medical workers create and maintain digital patient records, and it just posted blowout earnings numbers. If you're interested you can learn more about Top Stock Insights and this dynamic healthcare stock HERE.
