The notion of a self-sustaining and smooth recovery in the U.S. is in jeopardy and is now further complicated by the sovereign debt contagion in the eurozone, which, too, is being addressed by kicking the can in a temporary but not meaningful way.
In the final analysis, the budget impasse in the U.S. will be "resolved" but only with some more can kicking.
As to the U.S. stock market viewed as a leading indicator of growth, that is bogus, too. In 2002, 2007 and in the first half of 2010, the direction of the U.S. stock market gave the wrong signals on the direction of economic growth. Stated simply, the recent two-week rally in stocks is, too, giving the wrong signal of smooth and self-sustaining growth.
Over the weekend, I received numerous emails from some of my more thoughtful friends in the investment business. With few exceptions, they have acquiesced to the strong price momentum of stocks. Some saw the rally as a "good overbought," and many remarked that skepticism remained high and that, until there was a more pronounced shift to optimism, stocks would continue to rise. Others expressed the view that stocks have discounted the problems and, with inflation "low" and interest rates near zero, stocks were cheap and the best house in a bad neighborhood. Some were even more honest and simply said that their investors paid them to be long not to be skeptical, especially when stocks were rising. (In other words, don't fight the tape.)It should be noted, however, that sentiment has shifted to a more optimistic mood with advancing share prices:
- The AAII individual investor survey is at five-month high (42% bullish/26% bearish).
- The CBOE 10-day put/call ratio has fallen from 1.15 to 0.92.
- ISI's hedge fund study indicates a swift and sudden rise in net long positions in the past seven days (from 49.4% to 52.6%).