- - Thursday, October 20, 2011

ANALYSIS/OPINION:

Last week, I described the stock market characterized by the S&P 500 as a roller coaster flirting with a hill it has tested several times since August. As this week has shown, the S&P 500 did not break past that resistance line and, as I write this, the index is down 1 percent this week, bringing the year-to-date performance for the S&P 500 to minus 3.5 percent.

As has been the case in recent weeks, the stock market this past week was once again driven primarily by the news flow regarding the eurozone, even though we received a flurry of economic data and corporate earnings kicked into high gear for the recently completed quarter.

There has been much speculation as to whether the plan to recapitalize the eurozone would be in place ahead of the Oct. 23 summit of European Union leaders. In addition to whether a plan would be passed, there have been many questions pertaining to the size and scope of the plan and how it would be deployed. On Thursday, the domestic stock market came under pressure after reports that Sundays European summit might be postponed. Adding fuel to the fire, German Chancellor Angela Merkel canceled a Friday statement to parliament on the European Union summit.

That concern was soon put to rest as French President Nicolas Sarkozy and Mrs. Merkel issued a joint statement calling for immediate talks with the private sector over the Greek debt. The two leaders also signaled that a plan will soon be put in place to address issues in the eurozone; however, it seems the two countries remain divided over how to strengthen the European Financial Stability Facility.

Some perspective: It can be a challenge for my family of five to reach consensus on which restaurant to eat at; I suspect there will be more than a fair amount of horse trading in Europe in the coming days, and I would not be surprised if the eventual plan does not give all things to all involved. As such, while the market is rebounding on the speculation of what may happen, Im waiting to dissect the actual plan as it becomes actual news.

In terms of other key news out this week, the combination of government statistics and those from other parties continue to paint the picture of a weak domestic economy that will continue to feel like a recession for the near term.

Earlier this week, the Bureau of Labor Statistics released its domestic Producer Price Index (PPI) for September, which much like that released this week for the United Kingdom, was hotter than expected, coming in at 0.8 percent for the month and up significantly compared with August.

What makes the inflation data all the more worrisome is domestic high unemployment, growing layoff chatter and lack of wage growth. When viewed collectively, the question that springs to mind is: What will happen to disposable household income and consumer spending? The answer is not likely to be a pretty one, particularly since the Bureau of Economic Analysis already reported declines in real disposable income for both July and August.

Echoing those findings, the “misery index” which is simply the sum of the country’s inflation and unemployment rates rose to 13.0 in September, up significantly from 8.9 in 2008 and 11.3 in 2009. All in all, the 13.0 reading for September marks a 28-year high.

Putting the pieces together, it rings of another round of consumer belt-tightening in the offing, especially as consumer sentiment as reported by Gallup has continued to sour. As we have seen in the past when this type of belt-tightening occurs, consumers tend to trade down, shop discounts in the search of value and eat more at home.

As we head into the holiday season, I suspect this will more than likely be the case once again.

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. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.