Recovery Continues, Despite Headwinds

June 2, 2010
As the S&P 500 Index has pushed higher and higher, we have been warning many groups across the country to be leery about how much ascent is left to go in this segment of the rising trend. 
More rise lies ahead, but not in our immediate future, and most likely not at the same blistering pace. Beyond the immediate future, there are some longer-term head winds pushing on the market, such as: higher taxes, downward pressure on corporate profits from burgeoning inflation and the corresponding increase in interest rates, and demographic trends.Regarding the U.S. stock market’s near-term trend probabilities, the torrid rising trend needed cooling off. The precedents for this kind of rising trend were fairly clear. We could either continue to see an overbought market continue blissfully but fearfully upward or we could experience a period of consolidation and a bit of a reality check. The former leads to nasty declining trends where the market becomes oversold; the latter provides for a flat to mildly negative trend with the market heading back up for 2011. Having the stock market weakness now, rather than later, decreases the chance of a recession in the latter half of 2010 and in 2011.Don’t forget about inflation. Inflation’s return to normal levels is now well established and is a sign of the sustainability of the recovery. The Producer Price Index is also rising, driven by increases in raw materials costs, including steel, aluminum, and industrial chemicals. The relatively subdued rate of price inflation combined with a high rate of unemployment is providing ready justification for a continued rock-bottom interest rate policy by the Federal Reserve. Concerns persist, however, that the unprecedented growth of the federal debt could lead to significant inflation difficulties down the road. Taxes will be going up on high-income earners beginning in 2011. Additional tax increases coming from the new healthcare legislation should also be part of your cash-flow planning. Tax increases should also be anticipated from Federal, state and local governments as budget constraints become worse beginning in the near term and continuing in the years to come.Interestingly, few folks seemed to know about some good news, like the increase in U.S. employment (let alone the gains in manufacturing employment). People are being called back to work. The turnaround in employment hasn’t hit the financial sector or the IT/communications fields as yet, so many parts of the media may have understandably missed the good news. It is important to note that there are benign interest rate trends going on in most economies outside of countries such as Greece and Spain. In terms of U.S. interest rates, the leading indicator input from Corporate Bond Prices is one of relatively steady growth for the economy in 2011, or perhaps diminishing growth, with no recession in sight.Industry trendsIn industry trends, Nondefense Capital Goods New Orders is a great measure of business-to-business activity. While it’s true that the New Orders 12-month moving total (12MMT) is 10.9 percent below the year-ago level, the rates-of-change are positive and the 12MMT is moving higher. Plan on more business-to-business opportunities as we traverse the rest of 2010.General Purpose Equipment Production is in recovery, although the annual Production figure is 19.3 percent below the same time last year. Positive internal trends confirm our outlook for improvement over the course of this year. Secure credit now in order to be positioned to take full advantage of this rising trend.Automakers are responding to increased consumer activity by ramping up production. North American Light Vehicle Production on a monthly and quarterly basis is tracking well above year-ago levels. Expect more good news—and more orders—from this industry as we traverse the second half of 2010 and move into 2011.Alan Beaulieu, [email protected], is President of the Institute for Trend Research (, in Boscawen, N.H.

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