Crawling Right Along

07/08/2010 10:51 am EST

Focus: MARKETS

Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

Jim Lowell, editor-in-chief of Forbes ETF Advisor, is not giving up on the recovery, however haphazard.

Last July’s hopeful green shoot landscape has turned into this July’s brown lawn looking for a steady stream of good news, where cloud bursts of good and bad news have been, and will likely continue to be, the pattern. While some will make dooms day hay from such rows, I still think that that pattern is classically cyclical; the torrid pace of recovery (which many mistake for growth) always yields to the fact patterns of inconsistent strengths and weaknesses that are the compost of sustainable growth.

Our mid-year rankings and trades reflect the following themes: lower relative or absolute foreign stock weightings, a domestic (US) bias (even the top-ranked foreign funds skew toward those funds with a heavy mix of US stocks), and Asia. A blend of growth and value (an emphasis on a more balanced and blue-chip and/or leadership names approach) is another prevalent theme.

Back to our future, like a sugar high that frenzies self-aggrandizing feelings of accomplishments yet to come, we’re facing a form of a post-stimulus crash in domestic and global trust in the various confidence games our politicians can’t seem to quit. Notwithstanding the political proclamation of this being the “recovery summer”, there’s little doubt that we’re entering my expected phase of questions concerning whether or not all the given and pledged stimuli will or won’t cure the various patients—Europe, the US, the global economy, and marketplace—by this time next year.

As a result, I continue to expect that the next 12 months will be exceedingly volatile ... where disciplined perseverance will trump patent patience, but whose market sum is unlikely to be only negative. The most likely stock market performance pattern for the next few months will be one of ‘scalloping’ (a pattern resembling the way a scallop moves by jetting off the bottom and that looks like this: /\/\/\/\/\/\/\/ .

Moreover, while I wouldn’t rule in another trip to recession-land currently, I wouldn’t blithely ignore it as one of a series of possible detours en route to a sustainable recovery. Policy risk, generously read as either too much or too little stimulus spending, is tough to quantify or qualify. But that doesn’t mean there isn’t a fin or two in the market waters we swim.

As Europe falters and the US finds itself facing renewed fears of a double dip, uncertainty can get unbridled. Worries of a double dip are percolating rather than simmering down. I’m up and can smell the coffee.

Today, fear of the pace of growth in China has hope artists downcast. One day’s sell-off was triggered by one market watcher’s downward revision of China’s annualized rate of growth, the rate of growth China has been orchestrating to slow, from 12% to 9%. (9% is still robust growth in my books.) Add to the orchestration of that slowdown the offbeat effects of Europe’s woes and it’s easy to see why Fed Chairman Bernanke focused his June comments on Europe as an increasing threat to economic growth here and globally.

I’m focused on more down-to-earth and fundamental issues: evidence of a faster rate of decline in the pace of recovery and growth than is currently priced in worry me, but business and consumer spending lend me some confidence.

Even before we began July’s journey we saw a post-home-buying-credit hurricane hit housing sales, but prices are firming. Jobs remain in a recession, but income, savings, and spending for those who are employed are rising. Government spending and politicking are blowing gale force, but it’s still possible that such windage helps rather than hinders Godspeed toward recovery. Retailers aren’t selling many sweaters, but Oracle (Nasdaq: ORCL), the world’s second largest software maker, beat to the upside on their earnings forecast reflecting what the end-of-June’s durable goods numbers showed: businesses and consumers are buying technology. Apple’s (Nasdaq: AAPL) nearly 2 million iPhone 4 sales underscore that theme. Tesla’s promising IPO showed investors still have an appetite for growth stories. Another road: BMW’s new and pricey 5-series sedans are sold out; brand loyalty for big ticket items is as strong as it has ever been. Confidence, on the other hand, is not.

Confidence is a flighty thing. But, the economic and earnings fundamentals here and in Asia continue to favor recovery (i.e., not a double-dip recession) as the most probable outcome.

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