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Despite continued front-page fears over Greece?s
threatened exit from the euro and the military encroachments of the terrorist
group known as ISIS, investors apparently aren?t sufficiently worried enough
to sell equities.If anything, adage about the ?wall of worry? has been the
driving force behind recent equity market gains as the front-page fears have
been largely ignored.
Investors were skittish entering 2015, so much so that
billions were poured into safe haven assets including U.S. Treasuries and
precious metals.The soaring U.S. dollar (below) was as much a sign of the
flight to safety as it was a symptom of U.S. economic strength.
 
Since the start of February, however, there has been a
conspicuous change in investors? perceptions of the foreseeable future.To
begin with, the sudden reversal of investor fear can be seen in the chart of
the iShares 20+ Year Treasury Bond ETF (TLT), a proxy for the U.S. bond
market.Treasury prices haven?t fallen this sharply since the May-September
2013 period, which also marked a period of increasing confidence in the
future outlook for U.S. consumers and investors.During that period,
Treasuries and other safety assets underperformed vis-?-vis risk assets such
as stocks.
Another indication that investors have cast off their
worries (at least for now) is the dramatic plunge in the Dow Jones Utility
Average (DJUA).The utilities have given back all their gains from the last
two months and are experiencing their worst performance since 2013.Utility
stocks normally follow the direction of bond prices, so it?s not surprising
to see the DJUA?s recent weakness given the recent sell-off in Treasuries.The
relatively higher yields that utility stocks typically command along with
their safety-oriented reputation make them attractive to investors seeking
safety.The utilities benefited from the increased investor pessimism of the
late 2014/early 2015 period.Now the safe haven utility stocks are suffering
along with gold from the unwinding of the ?fear trade.?
Concomitant with the subsiding of investor fear is the
breakout to a record high in the New Economy Index (NEI).NEI is comprised by
averaging the stock prices of the most economically sensitive companies
within the consumer retail and business sectors, including Amazon (AMZN),
Fed-Ex (FDX), and Wal-Mart (WMT).After spending most of 2014 in a lateral
trading range, NEI broke out above the 1-year trading range ceiling earlier
this month and followed it up with another high last week.The implication
behind the breakout in the NEI is that consumers and business owners are
increasing their spending levels as we head further into 2015, a sign of
increasing consumer confidence.
The true state of the U.S. economy has been the subject
of heated debate lately.Going strictly by the accounts offered by many
respected economists, including Ed Yardeni and Scott Grannis, spending levels
on both the consumer and business levels are quite healthy.Government
statistics bear this out, as do various consumer confidence polls.Yet some analysts
insist that the government?s numbers are ?cooked? and do not accurately
reflect the underlying state of the economy.
According to an Associated Press article, while the
official unemployment rate has fallen to 5.6 percent, average hourly wages
have declined.It was also reported last month that a record 92,898,000
Americans are not currently in the workforce.One news service even reported
that there are still over 46 million Americans who are food stamp
recipients.As one analyst concluded, ?It is quite obvious that the official
numbers by the government are often very deceptive.?
So who is right ? the mainstream analysts who contend
that the U.S. economy is on the mend or the naysayers who claim the economy
remains stuck in neutral (or worse)?The source of the confusion can be traced
to misguided attempts at generalizing the enormous and multifaceted U.S.
economy.The economy is much like the weather in that any attempt at creating
a compressed generalization is bound to cover a multitude of important details.The
economy, much like the weather, covers a broad geographic area can only
produce a very sloppy ?average? picture while ignoring the scores of
micro-climates within that picture.What is commonly called the ?economy? is
simply a snapshot of the United States based on averaging the data within
various sectors.
Conventional economic analysis also tends to lump the
various socio-economic strata ? namely lower, lower-middle, middle,
upper-middle and upper classes ? into a single broad category.Presently the
U.S. upper-middle and upper classes are in a much more prosperous condition
than are the lower-to-middle classes.Because the higher income groups account
for so much of the big ticket purchases it tends to gloss over the fact that
the middle and lower income strata have lagged.This is one reason for the
differing accounts behind the U.S. recovery.
It?s often overlooked that at its core the U.S. economy
is essentially a financial economy.The financial sector accounts, directly or
indirectly, for a huge percentage of total economic activity.This is why
central bank policy is paramount to the overall state of economic activity in
America.Quantitative easing (QE) directly benefits the financial market by
inflating stock prices, which in turn benefits the financial sector (the
economy?s major component).As long as the financial sector is growing, it?s
only a matter of time before the rest of the economy follows suit.
There?s no denying the strength in the New Economy Index
(NEI) previously discussed.An expanding NEI is tangible proof that consumers
are spending at increasing levels while businesses which cater directly to
consumers are also seeing increased sales.This will eventually filter into
the broader economic statistics used by economists.NEI is essentially a
real-time reflection of consumer spending levels.
In the wake of the 1930s Great Depression, Freeman Tilden
made this timely observation:
?In a great state in prosperity, things are never as good
as they seem; on the other hand, in adversity they are never as bad as they
seem.This is why contemporary prediction is nearly always wrong.Long after a
tottering state should have fallen it is propped by the patient, law-abiding,
submerged, industrious and thrifty middle class, and by the mere habit of existing.The
heart continues resolutely to beat.?
Sometimes the lag between a financial market turnaround
and a general recovery in consumer finances can be quite long, as was the
case in the 1930s and 1970s.Given that the U.S. suffered its worst financial
catastrophe since the Great Depression in 2008, it?s to be expected that a
broad-based economic recovery has been very slow in arriving.As long as the
financial sector remains healthy and monetary liquidity remains loose, the
beleaguered middle class will eventually see improvement in its economic
prospects.Despite proclamations to the contrary from pundits, the U.S. middle
class will emerge from the Great Recession in a stronger state.
Clif Droke
Mastering Moving Averages
The moving average is one of the most versatile of all
trading tools and should be a part of every investor?s arsenal.The moving
average is one of the most versatile of all trading tools and should be a
part of every investor?s arsenal.Far more than a simple trend line, it?s a
dynamic momentum indicator as well as a means of identifying support and
resistance across variable time frames.It can also be used in place of an
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stock or ETF you?re trading in.
In my latest book, Mastering Moving Averages, I remove
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you?ll want to read this book.
Order today and receive an autographed copy along with
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http://www.clifdroke.com/books/masteringma.html
Clif Droke is a recognized authority on moving
averages and internal momentum. He is the editor of the Momentum Strategies
Report and Gold & Silver Stock Report newsletters, published since
1997.He has also authored numerous books covering the fields of economics and
financial market analysis.His latest book is Mastering Moving Averages. For
more information visit www.clifdroke.com
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