Summer Daze
“Roll out those lazy, hazy crazy days of summer
You’ll wish that summer could always be here”
Nat King Cole – Those Lazy, Hazy Crazy Days of Summer
A recent newspaper headline was “June’s stock market returns best since 1955”. Those inclined to look back a bit further in time might recall a headline of several months ago; “First quarter marks best start to year since 1995.” Not wishing to dash cold water on what is meant to be a cheery message I do though feel it is appropriate that we be reminded that the first quarter’s 13.07% advance followed the prior quarter’s decline of 13.97% and June’s 6.89% advance followed May’s 6.58% decline. (All numbers based upon the return of the S&P 500). Most investors are looking at year over year returns through the end of June in the low to mid single digits confirming that the market over the past twelve months is better represented by a teeter totter than a steadily ascending trendline.
Meanwhile, many observers of the US economy are forecasting the imminent demise of the economic recovery. One day’s headlines capture the mood. “U.S. Outlook: Is a Recession Coming, and What Could Trigger It?” “Anatomy of a Recession Webcast: Q3 Update”. “How to Prepare for the Next Recession: 9 Things You Need to Know”. The New York Times prepared to celebrate the tenth anniversary of growth without a recession, a record that has been exceeded only once previously in our national history, with a headline “Happy Anniversary, Economy! (Maybe. Sort of. On Second Thought…)”. The most frequently cited reason for the imminence of recession is age. It’s been a long time since we had a recession so therefore it must be almost time for us to have one.
Bears on the prowl for bad economic news are not entirely lacking in evidence to confirm their suspicions. The manufacturing portion of our economy has slowed from its previously robust levels of growth. Global growth rates have clearly declined. China US trade tensions and the possibility of bad behavior by Iran and its impact on oil prices are wild cards in the deck of global economic growth prospects.
For this observer though, there is much that is happening that is positive but often overlooked. Central banks in Europe, China and the US are now inclined to ease financial conditions, a sea shift from twelve months ago. Real final sales to domestic purchasers in the US, one of the best measures of consumer demand that represents two-thirds of the US economy, grew 1.6% in the first quarter but is expected to increase to 2.8% in the second. The imbalances that are present prior to economic recession are absent. Testimony to this is the average age of residential housing in this country having increased by five years since 2006, the largest increase since the 1930’s, indicating that cyclical demand in our economy remains relatively depressed and therefore offering substantial potential to support future growth rates. Finally, expectations for the rate of growth in corporate earnings have declined increasing the likelihood of positive surprises.
A likely winning wager is that for at least the remainder of this year and the one to follow both the economy and financial markets will be deliverers of significant dosages of good news. Smile, be happy and enjoy the season.
Mark H. Tekamp