To the casual observer, the stock market might seem to be acting a little daffy lately. For a month straight stocks headed higher, almost without interruption, on the idea that the recession was about to end. And then, out of the blue, talk of economic uncertainty and overvaluation springs up and stocks get tagged for big losses. But then, the very next day the market is higher on yep, you guessed it, a more upbeat economic outlook. And so it goes during troughs in the economy as mixed signals on the outlook are both frustrating and completely normal.
The recent bout of selling has been sponsored by something being referred to as the repricing of global recovery expectations. In short, this means that after some impressive upside action, traders are wondering what the future will look like from an economic standpoint. This has led to a more than 20% slide in China’s Shanghai Index and a spirited game of follow-the-leader in markets around the globe.
However, yesterday in the U.S., the mood turned a little more upbeat as we got some decent data as well as some reassurance from Goldman’s Abby Joseph Cohen that the economy would not experience a double dip back into recession-land.
On the data front, Europe has been a surprising source of strength recently. First there were the upside surprises from the GDP reports of both France and Germany last week. And then yesterday, we learned the German ZEW Economic Expectations Index jumped to 56.1 in August from a reading of 39.5 in July. Not only was this an upside surprise, but it marked the ninth increase in the last ten months as the index hit its highest level since April 2006.
Next up, although you had to look hard, there was also some good news to be found in the Housing Starts report. The headline provided a negative first impression as starts fell 1% to an annualized rate of 581K units, which was well below expectations. However, the weakness was caused by a decline in multi-family starts, which have been pulling back a bit after May’s 56% surge. But when you turn to the category of single-family homes, the news wasn’t half bad. Single-family housing starts rose 1.7%, marking the fifth straight monthly increase and building permits increased 5.8%.
Finally, although there has been a lot of disparaging talk about the outlook for the consumer of late, the retail sector turned out to be a bright spot yesterday. Normally, we don’t like to spend time rehashing the results of the various sectors on a daily basis. But this one seems to go straight to the heart of the current market dilemma.
