Not a bad weekend, if I don’t say so myself. I found some time to do some interesting reading regarding our favorite topic – the market. I must say, the bears are rhetorically fighting back against the stronger data-point case of the bulls.
- U.S. capital spending is finally perking up from a low level as corporations, realizing that protracted cost-cutting is hurting productivity and growth prospects, give the green light to pent-up investments.
Productivity dropped significantly last quarter, and that means companies will have to hire and acquire more to up their productivity. One for the bulls.
- China’s exports jumped a greater-than-expected 25% on year in January, representing the fastest growth since April 2011. Imports rose 28.8%, while the trade surplus fell 7.6% on month to $29.2B.
It is true the Asian New Year celebration is happening and folks are buying lots of things, but so what? Spending drives the Chinese economy and the Chinese are spending. Two for the bulls.
- The final reading for the University of Michigan’s Consumer Sentiment Index for January was 73.8, which was above the consensus for 71.3. The current reading was also above last month’s reading of 72.9.
As they are in China, so they are here, spending that is, and the reason is less feel the economy is going nowhere and more feel that it is going somewhere. Simple enough. Three for the bulls.
I could go on, but I’d rather take this writing to a different place, a place more meaningful, as it relates to both near-term and longer-term market movement – the coming US sequestration spending cuts. The breathless media has convinced everyone this is doomsday for the economy, but I have a question. If it happens, will it hurt the economy badly? The current standoff in US politics is about this question – fiscal restraint and its influence on GDP.
- Both sides of the aisle don’t seem to be afraid of the sequester. The Democrats look at it as their only opportunity to make any defense cuts, which the Republicans don’t want. The Republicans see it as – making any cuts whatsoever is a step in the right direction … So we may not do anything and the automatic (cuts) will kick in.
One of the interesting articles I read this weekend focused on answering the question I just asked – if the sequestration happens, will it hurt the US economy badly? The article is full of details and numbers, but I have to say the clearest information is in the chart below.
When reading the chart above, you should be encouraged. Of all the bullish signs I find about the US economy and the market, this one rings loud and clear – the final political impediment to the waiting secular-bull market appears meaningless. If the sequester happens, it might not matter. In fact, it might ultimately be a large positive for the market, as the market could perceive the US is finally cutting spending to a large degree, and, better yet, it has been cutting spending since 2010, quite significantly, and the nominal GDP has done well, relatively speaking.
Despite the data and the under reported reality of sequestration, the bears are still making the case the current flood of money into mutual funds is a contrarian sign, when the retail investor steps in with big dollars, the end of the bull rally is near. Here is one piece of that argument.
- Other conflicting (still bearish) sentiment indicators include low mutual fund cash levels at only 3.4% of total mutual fund assets, according to SentimentTrader.com.
Okay, so mutual fund cash levels are 3.4% of total mutual fund assets, and this means a whole lot of money could come out quickly if panic hits. Something to think about surely, but this also speaks to a certain amount of confidence in the market, does it not? Now, if the sequestration happens without great panic, if corporations spend more on hiring and acquiring, if the Chinese economy keeps moving forward, if the US consumer keeps spending, and if Europe recovers economically this year, it is possible that all those trillions will just keep on working in the market. Something else to think about …
Trade in the day; Invest in your life …
