What Flavor is Your Double Dip?
by Paul J. Nolte, CFA
June 28, 2010
Whether rocky road and chocolate or simply strawberries and vanilla, there is nothing like a double dip of ice cream on a hot summer day. Just in time to honor the beginning of summer, all Wall Street is talking about double dips, however in this case it is not the refreshing frozen variety, but a second recession following the “great recession”. Supporting evidence includes the rather lousy housing reports of the past few weeks, poor earnings reports from retailers like Walgreen’s and Best Buy and the second revision (lower) of first quarter economic growth. Those against the “double” cite a very steep yield curve (difference between short and long-term interest rates), a still very accommodative Fed (will be keeping rates low for the “foreseeable future”) and a government ready to hit the stimulus button any time it is needed (more debt for more spending). While we weren’t big proponents of the “V” recovery, a slow to no growth economy is certainly within the realm of possibilities. Officially, the last recession has not ended, so it is hard to say we have entered another one! Time to get going on that cone before it all melts in the summer heat!
It will be pointed out that the 3% decline of the past week was due to the rather poor economic data and the talk of a “double dip” recession. However, investors have made little headway over the past nine months, as the SP500 is where it was in late September. The economic data since then has been mixed at best and the wrangling in Washington has investors on edge about tax law changes and the “new” rules of the investment road. Add to the mix the general inability of the markets to sustain more than a couple day rally (or decline) has frustrated investors and their willingness to stick with such an erratic market. The coming week is shaping up to be an important one as market moving economic reports hit throughout the week, culminating in the unemployment report. After the Monday holiday, earnings season starts up. The economy and financial markets are likely to be showing their true colors over the next week or two.
The bond market continues to rally, pushing the yields on the 10-year treasury ever lower � now just above 3.1%, after hitting nearly 4% in April. As such, the bond model, a trend following model for bonds, is still pointing to a further rally in bonds and lower yields. Higher commodity prices last week, led by gold, removed one support for bonds, however corporates, governments and utility stocks (all components) are still pushing higher and keeping the model in “buy” territory. As long as the economy doesn’t roar and the Fed stays on the sidelines, bond investors should do just fine. However, if the employment report Friday shows job creation well above 200,000, the two-month rally could end.
© 2010 Paul J. Nolte, CFA
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.