Green Shoots Are Spreading

05/18/2009 10:48 am EST


David Fried

Editor, The Buyback Letter

David Fried, editor of David Fried's Buyback Letter, says there are clear signs of improvement in the economy, and investors should be scaling into the market...

As we settle into spring, we are heartened by some "green shoots,"-signs, however small, of improvement in the economy and our financial system.

Are they signs that we have reached a bottom and are on the up swing? Are they merely signs that things are less bad than we feared they might be? Does "less bad" equal "good"?

We don't know, [but] the evidence of a recovery is mounting daily.

Stocks were up in the US. Worldwide stock markets [have risen] in a spring rally. The Standard & Poor's 500 [has] erased its 2009 losses. Since a low on March 9th, the Dow Jones Industrial Average is up 29% and the Nasdaq Composite index was up 39%.

Stocks were up across the pond. Across the globe, China showed an up swing in manufacturing, which spurred a rise in the Shanghai composite stock index to its highest level since August (up nearly 41% this year), and stocks rose across Europe and Latin America.

Oil was up. Another sign of improvement is that crude oil prices [hit $60 a barrel], the highest since November [as] hints of an economic recovery have pushed prices higher in recent weeks.

Home sales figures look better: The National Association of Realtors said pending US home sales rose for a second consecutive month in March (and rose more than forecast), and construction spending rose unexpectedly in March after five straight declines.

Mortgage rates were looking better. Rates on 30-year mortgages have fallen and are hovering very attractively in the under-5% range. A previous record low of 4.96% was set in the week of Jan. 15.

Earnings are better than expected. News that first-quarter earnings from across the market are coming in better than expected raised hopes. Sure, perhaps the "expectations bar" may have been set low, but more than half the companies in the S&P 500 have reported their first-quarter results so far, and of those, 65% beat analyst expectations.

Consumer spending was up for a second month. Consumer spending, which collapsed in the second half of last year, revived in the first quarter. Consumer spending edged up for the second consecutive month in February, even though incomes slipped due to layoffs. In the months ahead, consumer spending should be lifted by tax cuts contained in President Barack Obama's larger $787-billion stimulus package.

We do not want to interpret data through rose-colored glasses. Certainly, dour economic reports have outweighed the positive for months, but we may be seeing a stream of slowly improving data.

The stock market typically turns around, on average, about six to nine months ahead of the economy. If you have money on the sidelines it would be wise to scale it back into the market. If you are on the sidelines during the early stages of a recovery, you are likely to miss some of the best gains the market has to give.

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