Weekly Update: Weakness of Strength?

The average ranks of the sectors are showing a market in a potential state of flux. Consumer Good, Consumer Services, and Financial Services are short term ranks are all much weaker than their long term ranks. However, both Energy and Industrial Materials are much strong in the short term than their long term rankings. Of course the energy and commodity boom and bust, as the global economy went into recession, is what triggered the sharp declines in the market in the first place.



The question becomes, is the strengthening of those sectors a sign of strong demand moving forward or just a short term bounce from depressed levels? The data alone isn't going to answer that question, and certainly a single data point won't be able to. The important question to ask yourself is: If the market truly felt that the economy was getting strong, why would consumer based stocks be getting weaker?

My view on the question is rather simple; the horses are out of the barn. While this recession may have been triggered by the global financial crisis it has sparked a massive change in the behavior of the consumer, and that isn't something that you can fix not matter how much money you throw at it. Just as the banks leveraged up their risk, so too did the average person as they lived beyond their means through even increasing debt. That pattern is now changing and no matter what the government, or anyone else, tries to do, it is a trend that will continue.

If the average consumer was living at 100% of their means (an effective zero savings rate) and the new consumer will be living at 90% of their means (10% savings rate), you can expect a 7% drop in GDP. If the savings rate goes up to 20%, as I feel it will the GDP will contract by 14%! Those numbers are much worse than people are forecasting, and it is going to take at least a couple of years for the numbers to play out. Unfortunately the "pain is no fun" mentality of this country will have the government spending like crazy to make up for the shortfall, which will only serve to lengthen the downturn and dampen any recovery.