Kass: The Case for a Summer Snooze Fest

This blog post originally appeared on RealMoney Silver on July 9 at 8:05 a.m. EDT.

Since I have been out for a few days of meaningful and persistent downside pressure, let's frame the market expectations that have led up to my current outlook for stocks over the balance of the summer and into the fall.

Like Shakespeare's Polonius, I adopted a neutral view of U.S. equities in late May in a column entitled "Neither a Bull nor a Bear Be."

As stocks continued to rise, I argued in early June on CNBC's "The Kudlow Report" that, while I remained confident that a generational low would not likely be breached for years (if not forever), equity valuations had nonetheless more than discounted the second derivative improvement in the economy, and stocks were running ahead of the real economy.

In addition, I further opined a month ago:

• More tangible signs of economic traction are necessary before the markets move higher.
• The trajectory of economic growth will be shallow and will likely disappoint the equity markets during the second half of 2009.
• Massive cost cutting has resulted in better-than-expected first-quarter 2009 profits, but it holds a downside as significant employee layoffs (and a still-weakened consumer) threaten the seeds of domestic economic growth over the intermediate term.
• Savings rates will remain high, and personal consumption expenditures will remain low for an extended period of time.
• The specter of rising taxes and higher interest rates in late 2009/early 2010 will likely impact an already fragile recovery in the economy and in the markets -- a double-dip is due then.
• Near term the market looked increasingly exposed and the upside was certainly capped.

In mid June, as stocks moved to 2009 highs, I stressed that the markets were getting stretched ever more by investors and traders who worshiped at the altar of price momentum. I further suggested that, while the economy was getting "less worse," stocks were increasingly vulnerable and ahead of the real economy.

I went on record that a decline of between 5% and 10% was imminent.

As stocks began to slip during the following week, in "Three Summer Scenarios" I offered the view that, following the selloff, a sideways correction or a deep correction held a combined probability of 65% and that a continued rally held only about a 35% chance.

Thus far, the market action in July has been abysmal and has generally confirmed my forecasts. At Wednesday's mid-afternoon low, the S&P 500 had fallen by about 8.5% from it's yearly high, at the upper end of my mid-June forecast of a drop of between 5% and 10%.

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