2011 End of Summer Outlook

Okay boys and girls, it’s song time here at Hunchenomics; sing it if you know it.

Will the market grow

Will it wobble to and fro

Will unemployment drop

Will credit flow

Are your assets all tied up

And you’re feeling really stuck

Will the mar-ket grow

What does the market have in store for our portfolios in the short term?  It’s really anyone’s guess but I expect a sideways rollercoaster for the remainder of the month.  The summer is traditionally a technical play due to summer vacations but now there is a particularly strong case for technical trading.  The bad news is that equity markets have retreated due to the downgrade of the U.S. government by S&P but the good news is that they have seemed to stabilize.  Furthermore, the best news of all is that government borrowing continues to have strong demand at low rates and that strength in the treasury market has carried through to broad debt markets.  This phenomena is both really good and really surprising; while nothing has materially changed and in spite of S&P, or any other rating agency, U.S. government debt is virtually risk free; but it is still a little surprising that borrowing costs for everything from mortgages to auto loans haven’t increased.  The demonstrable willingness of banks to overlook a rating agency’s downgrade and see the true economic picture is quite remarkable and in so doing prevents a credit crunch from creating economic strife.  While looking at a chart of the Dow for the past two weeks might be a bit unnerving, it is really quite good news.  Yes, the market dropped leading up to and after the debt ceiling was renegotiated but that was to be expected and its timing, during the low volume summer days, is well placed.  Technical trading seems to have set the floor in the 10,800 = 11,200 range; while far off the year’s high it isn’t so far a drop considering the fairly significant news and global economic easing.  Debt markets are still strong and banks are still lending.  These are encouraging signs.  The current volatility is great for day traders and looking forward, equities are slightly undervalued.  The most recent round of U.S. debt was priced so cheaply equities become even more attractive.   The remaining challenge to a rally are twofold; first, to buck the technical traders there has to be strong fundamental news, none of which is likely to be forthcoming, and second, the economy is fundamentally weak and weakening.  There’s good news here also; although jobs growth is slowing and economic sentiment across senior executives is weakening but credit remains.  There is likely no good new forthcoming about the economy and there are likely to be a few more minor shocks due to the expiration of government aid programs but the economy will likely continue to slowly expand.  An expanding economy, unattractive debt returns, and undervalued equities should facilitate the slow growth of equities once the Summer recess ends in September.  I also expect that the previous high for the year won’t be challenged, a few more weeks of high volatility followed by slow deliberate growth and reasonably easy credit aren’t such bad conditions considering the underlying fundamentals.

Sing me out…

Will the market grow

Will GDP growth slow

Will hiring stop

Will borrowing go

Have your assets gone haywire

And your broker you will fire

Will the mar-ket grow         

Tagged as: Economics, Finance, HunchEnomics