Stocks managed to rally again in mid-May, withstanding a continued rise in energy prices, ongoing wo...
Stocks managed to rally again in mid-May, withstanding a continued rise in energy prices, ongoing worries about credit problems and concerns over the weak economy.
Factoring in these gains, stocks are now more than 10% above their lows from two months ago, within a few percentage points of where they started the year and less than 10% below their all-time highs.
Our optimism regarding the economy and the markets this year has centred around our belief that the makings of a traditional recession have not been present. Recessions typically occur when the excesses of an economic expansion receive a sudden jolt.
The problem with the recession argument this time is that, outside of the credit market, excesses have largely been absent. While there is no denying the impact that housing and credit issues have had on the current state of affairs, we simply do not see the makings of a recession.
First-quarter GDP growth was positive, and given that the federal government is writing millions of stimulus cheques, it seems unlikely to us that the second quarter will show a contraction.
At the same time, the labour market and corporate earnings have been under pressure, but have largely remained resilient. The overall economic data have been weak, but areas of strength remain (such as the non-financial corporate sector and exports), and we have not yet witnessed the full effects of monetary and fiscal stimulus.
While we do have a generally positive view on the long-term prospects for equities, we would be remiss if we did not point out some of the potential risks. An absence of a recession would also mean we are unlikely to see a strong recovery, and inflation could at some point become a pressing problem.
We also believe that, following the November elections, there is a better-than-average chance of seeing some higher tax levels, a more stringent regulatory environment and perhaps an increased focus on protectionist trade practices - hardly a background conducive to a strong equity bull market.
Over the shorter term, the rally in stock prices in the past two months may result in a period of consolidation and sideways trading.
- Stocks now ahead of where they started the year
- The absence of excess means elements of traditional recession not present
- Strong recovery unlikely.
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch
To drive progress