Inside The Stock Market ...trends, cross-currents, and outlook

What little discussion of a possible U.S. recession there had been in the first half of the year has dried up with an apparent pick up in the economy. “Inside The Stock Market” this month presents a 2008 Recession Watch, identifying some indicators which may prove useful in assessing the possibly of a coming recession.

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Yes, the S&P 500 is near all time highs, but what if the index was denominated in other currencies? Denominated in euros, the S&P 500 is still 30% below its March 2000 high.

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This global bull market in stocks has been unusual in that it’s been accompanied by bull markets in things that often exhibit little correlation or even negative correlation to equities.

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Performance chasing Main Street investors have been channeling their assets elsewhere, despite the respectable returns to be found within their own domestic equity market.

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2007 half time report. Revisiting our original 2007 projections with some current modifications. Outlook for stock market, interest rates, inflation, profits, economy, the deficits, the U.S. dollar and gold.

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At a time when the public remains largely sidelined, corporations, private equity, and professional investors continue to take the U.S. stock market averages higher.

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This is the first time that combined net demand for open-end funds and ETFs has been negative since last December, and is quite interesting, even unusual, considering the stock market continued to post new highs during the most recent month.

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It is getting increasingly clear that current stock market gains are being built upon the backs of corporate and private equity investors.

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After one of the most active months ever for private equity offers, we revisit our LBO screen in “Inside the Stock Market” section. This screen has thus far outperformed the S&P 500 since we introduced it in January of 2006.

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The Index of Leading Economic Indicators has a proven track record of indicating when a recession may be near. Although this index has been trending sideways for quite some time, it has not yet rolled over.

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Valuations set the stage for better performance out of growth.  But it is important to note that there’s precedent for the value cycle—seemingly already overextended in time and price—to get much more extended. 

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Our Attitudinal analysis—or investor sentiment—normally deteriorates badly leading into a major market top, but has held up surprisingly well in the face of the last several weeks’ almost relentless, daily upside action. 

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Steve Leuthold revisits the 1987 stock market, and includes some excerpts of his commentary in the Green Book from the months leading up to the October crash. There are some stunning similarities to today’s market. Also, commentary on the current China stock market. Some have compared it to Japan in the late 1980s, but there are distinct differences.

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We view traditional open-end funds as the primary indicator of individual investor sentiment, and consider ETF demand primarily a function of professional demand. With that said, the positive $3.5 billion going into open-end U.S. stock funds in April tells us that individual investors remain cautious.

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Initial results for Q1 earnings look disturbing. Analyst estimates of 2007 year end earnings for stocks have been declining across all market cap tiers, with biggest declines in the Energy sector.

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Steve Leuthold discusses the rationale for using “normalized” earnings versus 12-month earnings and how it now makes little sense to sell in May and go away…..unless you need a long vacation.

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An In Focus Special Research Study sent in late April provides a detailed look at the growth of the ETF industry and endeavors to organize the ETF universe into meaningful categories.

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Clients who use our equity group work are well aware of the successful history of picking groups through the quantitative Group Selection Scores (GS Scores).

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Factors driving the stock market obviously vary considerably over time. We isolated 10 factors to show what has been working so far in 2007. Best indicator in 2007 is low short interest, while the worst factors have been Low Price/Book Value and Low Beta.

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While the “Sell in May” market phenomenon has become part of Wall Street lore, the sector implications of this seasonal pattern are less well-known.

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