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Is One Final Upward Lift in the Cards this Year?

Is One Final Upward Lift in the Cards this Year?
We, at Hennion & Walsh, believe the U.S. economy will continue to struggle to build any type of sustainable recovery in the face of historically high levels of unemployment, continued fears over excess leverage and lack of any meaningful gross domestic product (GDP) growth.  Our primary concern centers on job growth.  According to the Bureau of Labor Statistics, the current U-3 unemployment rate stands at 9.6%.  However, when one considers the wider encompassing U-6 unemployment rate, which counts not only people without work seeking full-time employment (i.e. the more familiar U-3 rate), but also counts marginally attached workers and those working part-time for economic reasons, of 17.1%, it begins to become very difficult to imagine a scenario where consumers will start to spend at the levels needed to build a sustainable economic recovery.

 

Despite this, we view a scenario where the equity markets make one final push upward in the final quarter of the year as likely based upon the following.

  • Economic Cycle – The economy appears to be in an extended “pause” period but it appears that the market’s current verdict, after a weak August, has been to conclude that the prospects of a double-dip recession are now less than originally feared.

 

  • Earnings Trends – Analysts have reduced estimates for the 3rd Quarter, which sets up the potential for another good positive surprise season – exemplified by Alcoa’s recent, good report and subsequent stock increase.

 

  • Stock Market Seasonal (and Congressional) Effects – Are considered favorable for equities: the November – March period has traditionally been one of the best time periods for stocks.

 

  • Political Landscape –   Likely Republican / midterm gains will pressure Democrats to get more in tune with Main Street business, if not Wall Street business, and taxes may not go up on the business and investor class as much and/or for as long as feared.
  • Technical Indicators – Our 200 day S&P 500 trailing average, a key technical indicator, is approaching a traditional “buy” signal as our research indicates more growth can be expected when the S&P 500 breaches the 5% level.

 

Volatility, however, will likely stay at elevated levels during the fourth quarter of 2010 and the likelihood of several intermittent starts and stops in the stock market remains in our opinion.  Accordingly, we believe that it is appropriate for investors, working with their financial advisors, to consider adding a wider range of asset classes to their strategies given the uncertainty in the markets in the months ahead.