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Market views - USA

June 2010

The US is at a fascinating juncture with most indicators reflecting a decent recovery. This is most obvious in manufacturing where industrial production is strong, capacity utilisation is creeping off the lows and our favoured ISM indicator well above the boom bust line of 50. All in all very respectable and consistent with strong overall growth. On the flipside there are still real concerns in respect of employment and consumption.  Despite being several quarters into recovery there is little evidence yet of new jobs being created. To be fair the situation is much better than it was but for a durable self sustaining recovery to be in place further improvement is needed. The unemployment rate is stubbornly high at 9.7% although once underemployment is added (those forced into part-time or lower paid work) the figure is more like 17%. At present employers are working existing staff harder rather than taking on anybody new, a situation confirmed by increasing rates of overtime. The reaction to this has been to underspend income or put another way to save more. An entirely understandable reaction to an uncertain outlook, but one that leads to curtailed spending and less growth.  

Housing has been a beneficiary of Government intervention and tax breaks which have done a good job of stimulating a recovery of sorts. But the recent removal of the stimulus will lead to a, perhaps severe, slowdown in housing indicators for the next few months. Consequently getting a sensible read on housing is going to be difficult until later on in the year when these distortions have worked out.

Finally on the macroeconomic front, sovereign debt issues are centre stage with widespread problems, most notably in Europe. Certainly the accumulated national and personal debt across most of the developed world is now a real problem. The resulting austerity measures will again slow growth at a time when the recovery is embryonic and fragile. In the US, these issues are in the future. Growth is fairly robust right now and despite high levels of debts and huge budget deficits the US and the dollar are both regarded as a safe haven.

The US stock market has been rather bumpy. Despite a good start to the year buoyed by very strong corporate earnings and decent macroeconomics a growth scare has taken hold. Up until its high in late April the S&P Index returned a respectable 9.2% but double dip and sovereign debt worries triggered a significant correction of 13.7%, leaving the benchmark up 0.22% year to date at the time of writing.

This brings us to the most important question. If the economy is going to double dip then the market may well get much worse yet, but this could just be a short plateaux in growth and therefore a great opportunity to buy markets. Getting the right answer is key to this year’s performance.  We have a thesis of short shallow cycles and this seems to be exactly what we are getting. In turn this may make the assessment of the economic outlook difficult for some time yet. In the short term we are slightly inclined to buy markets, but further out we still have deep concerns about the durability of recovery and also for the stock market outlook.

Page last updated July, 2010 ID1719