What’s changed between now and a year ago? There’s no shortage of people that think nothing much has changed. Greece and Portugal are still up the creek, and if anything they owe more money than before so things are worse. This peril associated with continued financial distress has been taunting us despite fairly resilient global economic data that seemed to surprise us (in a good way) up until the Japanese disaster.
The market seems to have to adjusted quickly (see previous posting) to the reality of an inevitable slowdown caused by the interuption in global trade (earthquake) and a speculative ramp up in costs (energy and other prices). The evidence is out there now. Consider today’s news items:
U.S. industrial production flat-lined in April, versus expectations of a 0.4% gain and on the heels of a small downward revision to March. Manufacturing output had been a beacon, a light, a positive force if you will, in the overall economy…..except in April.
Manufacturing production fell 0.4% last month (all in durables), the first decline since June 2010 and the biggest decline since mid-2009. As expected, the impact of the parts shortage from Japan had a notable negative impact on manufacturing, as motor vehicles/parts plunged 8.9% in the month, the largest setback since May 2009.
U.S. housing starts unexpectedly nosedived in April. Starts plunged 10.6% in April to 523,000 units annualized, and although March was revised up to 585,000 units (from 549,000), that doesn’t even begin to change the gloomy tone of this report.
The issue now is does one make decisions based on history or does it make more sense to look through the current ‘correction?’ I’m not a fan of that word correction, but in this rare instance I think its appropriate. As I pointed out in prior discussions…..an adjustment in expectations was inevitable. I’m obviously of the opinion that the market is going to recover. Lower pricing (costs = energy, commodity prices) and re-stocking inventory (autos, electronics) will be stimulative on a go forward basis.
Yes, despite the modest rebound in bond prices in response to the poor economic data releases it is inevitable that rates will rise eventually. Keep in mind that (as I’ve said in the past) central banks will not act to do this for months…….preferring to be too late rather than too early. The bond market jumped the gun a bit, and is simply settling back down. A temporary blip – stocks are again the place to be. We may even see one of those rare summer rallies. Opportunities are created by uncertainty, and if you truly believe in a financial Armegeddon own bonds, but if you agree that we’re just hitting turbulence on the way to a brighter economic future bet on stocks.