VERSACE: Positive signs amid economic gloom

ANALYSIS/OPINION:

This week we closed out 11 months of the year 2011 and with one month left to go before 2012, the S&P 500 is modestly in the red on a year-to-date basis.

In my view, the one word that describes the stock market year to date is volatile and I can say this given the wide swings we have seen in the market. At its highest, the S&P 500 was up 9 percent in the first half of the year and, at its lowest, it was down more than 14 percent. Applying sandbox math, we find the difference between these two extremes to be 23 percentage points. Surprisingly, this degree of change between the S&P 500’s high and low in 2011, at least so far, is the same in 2010 at 23 percent.

The volatility in November was particularly high and that was especially so in the second half of the month where the S&P 500 seesawed nearly 200, or roughly 16 percent. It was no coincidence that the negative part of that swing centered around ongoing concerns about the European debt situation that was resembling a contagion as Fitch Ratings, Moody’s Investors Service and Standard & Poor’s cut countries’ ratings, bond yields in Italy climbed and a disastrous German bond offering with only 65 percent of the 10-year bonds offered were sold.

The rebound was led by a far stronger than expected kickoff to the 2011 holiday shopping season, which included record Cyber Monday sales. This was followed by six central banks, including the U.S. Federal Reserve, cutting the cost of emergency dollar-funding for European banks and China easing curbs on lending. While concerns about a slower global economy in 2012 remain valid given fresh economic data, the coordinated dollar funding by six central banks helps to ease concerns about a market collapse. In other words, the market let out a major sigh of relief to the tune of an 88-point plus move in the S&P 500 in the last three trading days of November.

We have continued to get economic data that signals a slow-growth recovery headed into 2012. There have been some positive surprises, including this week’s ADP Employment Report that showed far greater private sector job creation in November. This has led many to anticipate a better than expected November employment report on Friday, however given the time of the year and the need for seasonal hiring I plan on keeping a sharp eye on the temporary component of the pending employment data from the Bureau of Labor Statistics.

All in all I find the Federal Reserve’s Beige Book for November summed it up best: “Overall economic activity increased at a slow to moderate pace since the previous report across all Federal Reserve Districts except St. Louis, which reported a decline in economic activity.”

Although we are on firmer footing issues remain, including dealing with our debt and deficit, job creation and more. By comparison, issues in Europe are far greater and led the Organization for Economic Co-operation and Development to cut its 2011 and 2012 global growth forecasts from 4.2 percent in 2011 and 4.6 percent in 2012 to 3.8 percent this year and 3.4 percent next year. One of the key culprits in that negative revision was the expectation for the eurozone to eek out near zero growth next year. All eyes are on the 17-member eurozone summit on Dec. 9 to see what solutions are bandied about to deal with issues plaguing the region. As always, the devil will be in the details - how big, how long, conditions - and so on.

As we head into the last few weeks of the 2011 and into 2012, the question of sustainability is one that will be asked more and more. Is the recent rash of favorable domestic economic data sustainable? Are we on the verge of a sustainable move upward in the stock market?

More as it develops.

• Chris Versace, the Thematic Investor, is director of research at Think 20/20, an independent equity-research and corporate-access firm in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. Follow him on Twitter @ChrisJVersace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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