When James Carville hung a sign with the phrase, "It's The
Economy, Stupid" on Bill Clinton's Little Rock campaign
headquarters in 1992 the message to campaign insiders was pretty
clear - Clinton was a better choice than Bush because Clinton
understood what the economy needed.
Now, I'm not going to get all 'political' on you today - but I
am going to talk about the economy. Whether or not Clinton really
delivered what the economy needed in the early 1990s is debatable.
But what's not debatable is that the market and the economy are
intertwined - so investors need to be aware of what's going on in
the economy right now and consider how it will affect stocks moving
***Earlier this week the Conference Board released the results
of the latest Consumer Confidence Index. The results were dismal as
the September consumer confidence level dropped to 48.5, down from
53.2 in August. The index measures consumers' feelings on the job
market and general business conditions over the next six
"Overall, consumers' confidence in the state of the economy
remains quite grim. And, with so few expecting conditions to
improve in the near term, the pace of economic growth is not likely
to pick up in the coming months"
said Lynn Franco, director at the Conference Board Consumer
Experts think consumer spending will increase only at a modest
pace throughout the rest of the year. This will hold back GDP and
limit growth in all sectors of the economy.
"The economy is stuck in an unvirtuous cycle. Consumers are
waiting for more jobs to be created, and businesses are waiting for
believes Wells Fargo economist Mark Vitner.
What's needed is a positive feedback loop in which greater
consumer confidence leads to consumer spending. In other words, the
consumer needs to be a part of the recovery - and that comes down
to job creation. Keep an eye on job creation and consumer
confidence numbers and look for stabilization in the trends to
signal a good time to buy stocks. When they improve, the market
will likely have already moved higher.
***Right now President Obama's staff could hang a sign on the
oval office that says, "It's Housing, Stupid". Any politician that
doesn't see the direct correlation between a stable housing market
and economic recovery should get a place in the unemployment
According to the S&P/Case-Shiller Index, housing prices
increased 3.2 percent from July 2009 to July 2010. New home sales,
existing home sales, and new housing starts all beat estimates last
month as well.
The Fed has done everything in its arsenal to drive short-term
rates as low as possible - thus bringing down mortgage rates and
making homes more affordable. It still has the option of purchasing
long-term securities in the open market which could keep rates
artificially low for an extended period of time.
But is this helping?
"What's hurting the housing market right now isn't mortgage
rates. It's a lack of confidence about the U.S. economy. It's
concern about losing a job"
exclaims Michelle Girard, economist at the Royal Bank of Scotland.
While affordable housing sounds great, people will only purchase
housing if they have reliable income. So housing comes back to job
creation as well.
The housing market is bouncing around near what could be a
bottom in my opinion. Even though prices have declined
significantly over the past 3 years, it's unlikely they'll drop
significantly from here - unless we enter into a new recession. I
think that's unlikely, and now is a good time to add exposure to
the housing market for investors with a longer time horizon.
In fact, I just added a stock to the
Cap Investor PRO
portfolio that has fallen because of exposure to housing. But
moving forward this company is increasing exposure to faster
growing sectors of the economy. When investors realize housing is
only part of the revenue stream, the stock could soar.
here to learn more.
***A pickup in manufacturing is also critical for a recovery.
Last month the Institute for Supply Management's factory index fell
from 56.3, to 54.5.
The manufacturing sector is still reasonably healthy, but it's
certainly decelerated. We need to see a pickup in hiring to drive
faster income growth and lead to acceleration in consumer spending
[or] we're doomed to this sub-par growth"
stated Stephen Stanley, economist at Pierpont Securities.
Again, manufacturing is all about jobs. Without taking on more
debt, pretty much a no-no right now, consumers won't spend when
they don't have a job. And manufacturing won't pick up without
growing consumer demand.
So really, "It's all about Job Creation, Stupid" is the sign
that should be hung on the door to the Oval Office, the Fed, and
every street corner, municipal, and state office complex throughout
Consumer confidence, housing, manufacturing - all come down to
We're seeing moderate improvement across the board even thought
data is bouncing around a little bit as we move toward the end of
2010. Look past the noise and you'll see that the data are showing
an economy recovering at a modest pace. Investors are taking
Take a look at the chart below, which shows the return of the
S&P 600 small cap index over the last year.
Since July 1st, t he S&P 600 has returned 10.6 percent, and
appears to breaking out above resistance. I don't fully trust the
move and wouldn't be surprised to see a pullback. But I don't think
we'll retreat back to 320.
Investors are catching on that the economy is stabilizing, and
stocks are finding long needed support. Expect things to get more
volatile in coming weeks as earnings season begins and speculation
picks up as to which sectors are actually poised to grow, and which
What do you expect from the upcoming earnings season? Let me
know. My address is: