Stalling. That’s the best way to describe the government-engineered rally that began in March. For all the trillions pumped into the capital markets, nothing can keep going up forever when the fundamentals don’t back up the prices. The S&P500 managed to eke out a 0.65% gain for the week as many of the trashy stocks that led the rally started showing signs of breaking down.
The fundamentals were, as usual, not strong. The trade balance came in worse than expected, primarily due to the rising cost of imported oil. The Treasury budget was negative $190 billion in May–equal to 42% of the deficit for the entire prior fiscal year. The Fed’s Beige book report was weak. Initial claims stayed above 600,000, and continuing claims were 6.82 million, maintaining 19 straight weeks of record highs. Michigan Sentiment, although slightly up from April’s reading, came in below expectations.
Technicals continue to show a very overbought market on a daily basis. The upward momentum is clearly weakening and the declining volumes suggest that the conviction behind the rally is also melting away.
Nouriel Roubini, the NYU economist who warned of an impending economic crisis back in 2006, highlighted several key reasons why the hopes for true economic recovery are just that–hopes.
Here are the key points:
1. Employment is still falling precipitously.
2. Private sector deleveraging has only just begun. Trillions of dollars of debt must go away.
3. U.S. consumers are still spending too much, and not saving enough.
4. Our financial system is still broken.
5. Weak corporate sales and profits will cause firms shrink hiring and capital expenditures.
6. Ballooning government debt will push up real interest rates.
7. Fed money creation could lead to goods price inflation and asset and credit bubbles.
8. Some emerging market economies may collapse.
9. Current account surplus countries (eg. China) will probably not grow their domestic consumption fast enough to offset the drop in consumption from current account deficit countries (eg. U.S.).
According to Roubini, all this may lead to global stagnation, and possibly eventual inflation.
Sounds like a recipe for the 1970’s–complete with its single digit stock market P/E’s.