In retrospect, the months of March and April appear to have been a turning point. While the bears will discount the six straight weeks of equity market gains, the “green shoots of recovery” dialogue and the slowing of the rate of deterioration in the numbers, we think that the biggest indicator of the potential for recovery is the market’s ability to initially stand up to the threat presented by the influenza A outbreak. While the influenza A situation was still up for grabs as of this writing, we got the sense that the market would prefer to embrace the positives instead of the negatives, and that more than anything suggests the world is working its way past its problems. In addition to theinfluenza A pressure on April 27th and 28th, the markets were also presented with renewed capitalization threats at two major US financial firms, and even that failed to rekindle a full blown anxiety event. However, even if theinfluenza A threat is easily discounted, that event has probably added to the burdens facing the economy, especially since the US 1st Quarter GDP reading came in down a surprising 6.1% last week!
On the positive side, both consumer and investment sentiment have seemingly improved, and there continue to be signs that the housing sector is getting into a position to recover. In looking at a chart of the unsold supply of homes, it is clear that the US market is starting to correct its oversupplied condition, and that could be a very critical development. Former Fed Chairman Greenspan has consistently maintained that the supply of unsold homes could be the single most important indicator on the economy, because the housing/sub-prime crisis is considered to be the primary cause of the crisis. However, one probably has to expect further bad news from the US employment situation, as the “green shoots of recovery” really didn’t serve to lift sentiment until the later stages of March. With theinfluenza A threat complicating things, one might expect to see discouraging US Non-Farm Payroll readings through at least the first week of June. In the meantime, a sideways to higher trade in equities would seem to favor the bull camp after the rather impressive run up in the March and early April time frame.
While copper prices showed a definitive pattern of weakness in the second half of April (after peaking out at the highest levels since last October), a clear pattern of declining LME copper stocks would seem to suggest that global industrial activity is holding together. On the other hand, US crude oil and gasoline stocks have not shown any indication of tightening yet, so there really isn’t any physical evidence of an improvement in the “real” economy.
All things considered, it would appear that an improvement in sentiment or attitude is necessary before a real repair of the economy can be expected. Therefore, we would suggest that traders continue to use the action in the stock market as their primary guide. In the event that equities avoid significant downside action or manage to extend the March/April rally, it could provide markets like cattle, corn, copper and the platinum group metals with some upside potential.