Where is the V?
The durable goods and ISM figures confusingly portray an industrial sector that has stabilized and exhibits signs of modest growth, but not aggressive expansion. Over the past few months, the economy has benefited from a mild inventory restocking period. I do expect a continued boost from inventories; however, the demand will continue to come from the corporate side of the ledger, not the consumer. Corporate balance sheets are in much better shape than are consumer balance sheets. The consumer remains farther back in the deleveraging process. Any expectation that the consumer would be a catalyst for recovery is without statistical merit. I listened to our friend Max Bublitz correctly identify the perils of "the debt super cycle" back in April. The unwinding of the cycle places the consumer in a rather precarious position for many years. The recovery in asset prices is not about consumer recovery, but about corporate and emerging market recoveries. With that in mind, I prefer exposure to large cap growth stocks and emerging markets down the 2009 stretch.
Last Friday's unemployment figure was disappointing. The past few reports have shown a slowdown in the rate of decline in job losses, so last Friday's 263,000 job losses was concerning. The question becomes - does a new downtrend unfold in job losses or can investors feel confident that the labor market will continue to improve in the next few months? No doubt the headline grabbing unemployment rate will top 10%, but I think the upside surprise is a possible much larger V recovery in job losses, with expansion a possibility for the start of next baseball season.
The recent trend in unemployment claims (see chart below) is currently in a steady downtrend since its early April peak. So, I would view it as a mistake to make a dramatic change in portfolios based on the possibility of potentially worse unemployment data in the months to come. The labor market has seen the worst of its declines, moderation has taken hold, and any further improvement will add further support to asset prices.
Even the economy experiences growing pains. Source Bloomberg