Disconnect
Between the Economy
and the Stock Market Continues!
By Sy Harding, editor
Street Smart Report Online
The
last ten days brought further signs that the economy is pulling
out of the `soft spot' in its recovery that had the Federal Reserve
concerned last fall.
Areas that have been
strong, mostly became even stronger in the latest reports.
Driven by rock-bottom
mortgage rates and poor investment alternatives, new home sales
hit a new record high in December, while existing home sales
rose a big 5.2%, the third largest monthly increase ever. Meanwhile
new housing `starts', which will become future sales, rose 5%,
while permits for new starts rose 8.2%. Construction began in
December on the highest number of new single family homes in
24 years, while the new permits for 1.88 million future starts
is the highest number ever.
Meanwhile, manufacturing,
the area that has been the biggest economic concern since the
2001 recession, has begun to show signs of improvement. And the
retail sector which had been strong but then began to cause concerns
when December holiday sales were a disappointment, has also bounced
back.
The ISM Index of manufacturing
activity showed a big rise of 4.7 points in December, which economists
predicted was an aberration that would be reversed in January.
But this week we learned it fell back only 1.3 points in January,
giving back less than a third of the December spike up, and at
53.9 continues to show that manufacturing is expanding again.
(A reading below 50 on the ISM Index indicates manufacturing
is contracting, while readings above 50 indicate expansion).
Similarly, the Chicago
Purchasing Managers Index, which measures manufacturing activity
in the mid-west and is considered a precursor of national activity,
rose 4.3 points in January to 56.0, also indicating that manufacturing
activity is expanding.
An additional positive
for the manufacturing sector is that wholesale inventories remain
at very low levels. If the economy continues to improve and wholesalers
begin to raise inventory levels at the same time that sales grow,
it would have a double impact on manufacturing activity.
The ISM Service Sector
Index was also released this week, and showed the service sector
(non-manufacturing) also rose in January, and at 54.2 shows continued
expansion in the service sector. New orders for services rose
to 56.2, the highest level in seven months, and employment in
the sector rose to 50.3, indicating hiring is ahead of layoffs
in the service sector for the first time in 15 months.
The most encouraging
numbers were released Friday morning, when the Labor Department
reported that 143,000 new jobs were created in January, the largest
monthly rise since November, 2000 (when the jobs numbers were
headed down and then reached negative territory where layoffs
were exceeding new hires). And the unemployment rate, which economists
had expected to remain unchanged in January, fell from 6% to
5.7%.
Within the jobs report,
it was the retail and restaurant sectors that showed the biggest
increases in hiring, adding 101,000 of the new jobs. That was
quite a reversal from December when retailers were laying off
employees due to the disappointing holiday sales.
Yet, in spite of this
continuation of improving economic numbers of recent months,
the stock market was down again this week, as war scares continue
to keep the focus off the economy. It was interesting that after
beginning the day on Friday in rally mode in reaction to the
much better than expected jobs numbers, the market was immediately
overwhelmed by the escalation of war talk and the step-up in
the terrorist alert system to orange, just one risk level short
of a red-alert, the highest level.
I'll knock on wood
(my head some would suggest), as I say this, but the market's
slide since the rally off the October low topped out again a
month ago, has been absent of any panic, in spite of the escalation
of war preparations, increased fears that chemical or biological
weapons will be used, the nuclear confrontation with North Korea,
and warnings of a stepped-up level of terrorists attacks against
the U.S., especially if war begins.
The apparent balance
of the combination of clearly improving economic numbers in the
midst of escalating war fears, leaves the market at a dangerous
juncture. It is as much at risk of a runaway upside move that
leaves investors behind, if the war uncertainties are resolved
one way or the other, as it is at risk of an accelerated plunge,
if the worst of the war and terrorist fears take place.
Either move could be
sudden. It's been some time since we've seen 300 and 400 point
back-to-back down days, but they could take place if war uncertainties
unfold disastrously. Yet if the war uncertainties are resolved
without disastrous consequences, the upside could be equally
explosive. After all, even without a resolution of either the
economic or the war concerns, the rallies off the lows last July,
last October, and as recently as 6 weeks ago off the low of December
31, consisted of quick back-to-back daily moves of 300 to 400
points each that had the market up close to double digits in
a few days, leaving investors and analysts behind and scratching
their heads.
Not easy times for
investment decisions right now, for sure.
Editor's Note:
Sy Harding is president of Asset Management Research Corp., 169
Daniel Webster Hwy, Suite 11, Meredith, NH 03253, publisher of
The Street Smart Report, 1 year, 17 issues, $250 (now
in its 16th year of exceptional market research for professionals
and serious investors) and The Street Smart Report Online
at www.StreetSmartReport.com, 1 year, $225.
Mr. Harding has consistently
been ranked in the Top Ten Timers by Timer Digest for
Stock Market Timer, Gold Timer and Bond Timer since 1990. In
his 1999 book, Riding the Bear How to Prosper in the
Coming Bear Market, Sy Harding outlined a simple strategy
that works in bull and bear markets, by which investors make
the big gains of a bull market, keep them, and continue
to make big gains in the next bear market (with just two simple
trades a year in any S&P 500 Index fund). Total return for
the last six years: S&P 500: +28%; Harding's STS: +125.3%.
That's thru 3 years of super bull market and 3 years of a serious
bear market! Easily verified. Check it out! Sy Harding's www.StreetSmartReport.com.
