Insights & Advice

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The Confirmation Effect

Ever notice that when the stock market goes up the number of negative stories dwindle while those with titles like “Recession? Not So Fast, Say Some” or “Why Inflation May Not Get out of Control” pop up daily? I call it the “confirmation effect” meaning that the media needs to justify why markets do what they do.

Investors were confronted with a bunch of contradictory numbers this last week. Retail sales and unemployment numbers did not drop as sharply as expected and now some economists are expecting the first quarter’s anemic 0.6% growth to be revised upwards. At least right now the economy and consumer spending continue to grow, even housing showed a rebound in April, say the pundits, so the market is simply confirming today’s reality.

Clearly May’s consumer confidence numbers which are now at a 28 year low do not reflect the bull’s view of the future nor does the United Nations. Its midyear economic report predicted that the world economy would only grow by 1.8% this year and is ‘teetering on the brink” of a severe downturn. So who’s right?

I’m banking on a slow down but a manageable one. As far as calling the day to day movements of the market based on some economic statistic, I say “fuggedboutit.” To me, it is much simpler. The stock market is climbing a wall of worry right now but is still mired in a trading range. It will stay there through the summer while we continue to get all kinds of economic numbers, (most of them subject to revision). The news will hit the wires. Stocks will react. The markets will move one way or another and at some point, closer to September, I suspect, we will see a spate of statistics that will indicate that the worst is over for the economy. The market will then rally into the end of the year.

For right now, stay invested. I remain positive that the S&P 500 has more upside to it and this present period of back and forth is simply the market gathering the necessary steam for another spurt higher, saying that the S&P still managed to eke out a 35 point gain for the week.

Of course all this talk about stronger economic growth has propelled commodities higher over the last few days. If the economy truly is not as weak as economists have predicted the price of oil and every other commodity should explode since greater economic activity usually means greater demand for all commodities. Gold has had a fairly decent run bouncing off support at $850/oz. to over $900/oz. by the end of the week.

Oil, the stock market’s bad boy, continues to climb closer to my target of $128-130/Bbl. All week, the market see sawed as the oil price moved up (bad for the economy, inflation and therefore markets) and down (good for everything under the sun). I am expecting a pullback in oil soon as more and more investors climb on the energy bandwagon.

I believe the stronger plays right now in the market continue to be commodity-related investments, transportation, technology and in the fixed income area, high yield. In answer to a reader’s inquiry, I am not a fan of bonds overall and expect the 30 year treasury bond yield, presently at 4.6%, to move north of 5.4-5.5% as the real inflation story begins to unfold.

Posted in A Few Dollars More, At the Market