Five reasons for economic optimism
The nation is still in the grips of a pronounced recession, and sometimes it's hard to detect bright spots amid the crush of news of layoffs and home foreclosures. Still, positives are starting to build up in the U.S. economy, and listed below are five that investors should note.
1) Q1 earnings season: So far, the first quarter has not been the disaster that many analysts had feared. Of the roughly 230 S&P 500 companies that have reported earnings, about 65 percent have exceeded Wall Street's estimates, or "beat expectations." That's encouraging.
2) The Dow: The Dow Jones Industrial Average has risen off lows near 6,600 in March to roughly 8,500 today -- a level that suggests the institutional bulls are winning the battle of "Dow 8,000" versus the institutional bears. Further, more market pull-backs are bringing out bargain hunters than one or two quarters ago, and a Friday sell-off -- a given for about a half-year or so -- is not guaranteed. Given that the Dow is a lead indicator, if the market can hold 8,000 and the 50-day moving average at 7,691, that suggests a considerable portion of institutional investors are bidding-up prices because they anticipate better economic conditions ahead.
3) The U.S. Treasury: The U.S. government is likely to report near-record revenue in April. It's a downside-upside stat. The downside? Many more taxpayers were "last-minute filers," and this is a bearish pattern, compared to having the Treasury collect taxes from these individuals on a twice-monthly basis. The upside? At least these taxpayers filed returns.
4) The price of oil: It's probably hard for investors -- it's certainly hard for drivers -- to cheer an oil price that's risen about 18 percent in two months to about $58 per barrel. A higher oil price reduces Americans' disposable income -- a macroeconomic negative -- but oil currently is at levels that few expected, given weak demand conditions in the United States and emerging markets. That suggests either one of two scenarios: 1) these oil bulls are dead wrong and are they going to take a bath, financially, when that demand does not appear and oil falls back below $40, or 2) the oil bulls have identified a dynamic the oil bears don't see -- rising demand in 3 to 6 months, which would imply a U.S./global economic recovery.
5) The ECB and China: This week, the central banks of the second and third largest economies in the world undertook monetary policies designed to further loosen credit markets. A day after China's central bank pledged to keep money flowing into the financial system to sustain growth, the European Central Bank said it would buy 60 billion euros, or $80.5 billion, in covered bonds to increase liquidity in the euro zone. Hence, when combined with the U.S. Federal Reserve's quantitative and super-quantitative easings, we now have all three major economic zones in credit market-support mode, which is a positive development, provided you agree with Keynesian economics.
And a sixth, anecdotal data point: consumer spending: It's just one data point, and hardly scientific, but in addition to official data, I always make a point of getting feedback from small business owners in the home region (metro New York City region). After recording horrible winter sales, a local optician in Mamaroneck, N.Y., indicated that "traffic was up noticeably in April and it's continued in May." He said traffic was not at "Roaring '90s" levels, "but it's steady enough to pay the bills," and he senses continuing demand. Encouraging.
Economic Analysis: Much more work remains ahead for policymakers, but regarding the U.S. recession, perhaps Wintson Churchill's famous phrase about the Allies initial battle victories against the Nazis during World War II is apt: "It's not the end. It's not even the beginning of the end. But, perhaps, it's the end of the beginning."
Financial Editor Joseph Lazzaro is based in New York.