Now that the US economy finally sees some signs of improvement, can it stay the course and decouple from the global train?
Decoupling from the Global Locomotive Possible?
The term “decoupling” has generally been used to describe a global economy that is no longer dependent on U.S. growth. However, several signs point to a strengthening U.S. economy that may be poised to regain leadership in the global arena. Will the U.S. economy successfully separate itself from the economic train wreck in Europe and the potential derailment of the Chinese economic boom?
Last Tuesday, the Dow finally had a solid close above 13,000, and the NASDAQ closed above 3,000 for the first time since December 2000. Two days later, the S&P 500 Index crept above 1,400. Although these index mileposts are mostly symbolic, they capture the headlines and should also capture the attention of retail investors.
The general themes of modest U.S. growth, a loose Fed policy and a soft landing in the emerging markets all create a fertile backdrop for equities. These conditions make it increasingly uncomfortable for investors to sit in cash earning almost nothing, while they watch stocks climb up significantly from their October lows.
Trading volume is still light to moderate, but investors are not likely to shun a 25% rise on lackluster volume alone. While we may be stating the obvious, the latest rally is much preferred over the “death by a thousand cuts” investors previously suffered from declines on this same light volume.
Positive Trends in the Labor Market
Last Friday, the government reported that nonfarm payrolls rose 227,000 in February. This is the third consecutive rise above 200,000. The question is, will it continue?
Two previous signals that the labor market was on the mend were followed by a soft patch in activity, and businesses quickly closed the doors on hiring. Will this third time be the charm, or will we roll over again? Although there is no correlation between jobless claims and nonfarm payrolls, it is not unusual to see volatility each week. These figures can be an excellent gauge of business confidence and activity, since layoffs will not subside until there is an increase in sales activity. Of course, the opposite also holds true.
Claims appear to be stabilizing at these lower levels, although they have not yet reached pre-recession levels. However, the drop in claims, from over 400,000 last fall, does signal a modest pickup on growth. These falling claims are further reflected in rising nonfarm payrolls. One reason for continued strong payroll growth is continued expansion in the service sector, which accounted for 209,000 of February’s 227,000 payroll job growth.
The Week Ahead
• The coming week features a light economic calendar, with housing numbers at the forefront.
• It is rather difficult to imagine a robust economic recovery without a significantly firmer foundation in the housing market.
• Home sales are rising from the bottom amid the latest rise in nonfarm payrolls.
• It is still early to lock in a trend, but this spring will be a good indicator. According to Jonathan Laing at Barron’s, we may still have a year or so to wait for noteworthy improvement in housing prices. He doesn’t see home prices rising significantly until spring 2013.
• The Middle East, particularly Iran and Israel, continues to be a wildcard.
• However, a stronger dollar has served to cap oil prices in the short run.
• When, or if, we see a headline-grabbing development in this region remains anyone’s guess.
• Don’t discount China. Weak economic data from this country could ripple its way into the U.S. markets. We’ve seen this before.
• First quarter 2012 earnings are beginning to come into view:
• The S&P currently anticipates a 5.6% rise in first quarter 2012 earnings vs. one year ago.
• Estimates gradually came down early in the quarter, but these have steadied recently.
Financial Update: 03/19/2012
Mark Dennis, CFP®