In 2010, the S&P 500 Index peaked in late April, declined, and then bounced around until August. Yields on 10-year U.S. Treasuries peaked around the same time and then fell, more or less, in the same pattern. The forward-looking Institute for Supply Management manufacturing index (ISM manufacturing) fell through the third quarter, then recovered a bit by the end of September.
This year, the S&P 500 Index peaked near the end of April, Treasury interest rates have declined since mid-April, and the unemployment rate has bounced up, although there was no increase in the labor force.
The U.S. economy hit a soft spot at this time last year, and this year it appears to be facing one again. Some of the headline issues also seem similar, such as an intensification of the debt crises in peripheral Europe and the approaching end of the Fed’s quantitative easing cycle. Last year, the economy and financial markets found firmer ground once Fed Chairman Bernanke offered to crank up the printing press, but what will happen this time?
First of all, don’t expect central bank heroism. The current quantitative easing policy worked by pushing investors out of Treasuries and into riskier assets, especially equities. Higher demand for equities meant higher equity prices, which translated to greater wealth, which resulted in higher consumption—at least among households that own stocks. As broad market valuations appear to be in line with historical standards, I don’t think another big Treasury purchase program would have much effect, and from what they say, the Fed doesn’t want to find out. Therefore, I don’t expect to see a big jolt of growth. We are still feeling—and for the next several years will continue to feel—the effects of the 2007-08 financial crisis, the pattern just about follows the textbook.
With households, businesses and financial institutions willing to be “neither a borrower nor a lender,” the Administration’s fiscal stimulus about to become consolidation, and major emerging economies trying to slow to a soft landing, expect the U.S. economy to grow, albeit slowly. The U.S. is creating jobs—reassuringly in manufacturing—although not fast enough. But I’ve noted that the federal government and some large states have reported income tax receipts that have exceeded projections. Higher tax revenues mean higher income. Higher income means greater capacity to consume. Higher consumption generally means higher profits and greater ability to expand.
Europe will continue to muddle through until it can nationalize the sovereign debt problems, and China appears to be slowing to a sustainable pace.
In sum, we’ll find our footing—we just won’t start sprinting.
The S&P 500 Index is a broad-based measure of domestic stock market performance that includes the reinvestment of dividends but does not include fees, expenses, or taxes. The index is unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results.