Monday, 17 October 2011

US avoids bear market and recession so far

Stocks in the United States pulled further away from bear territory last week as data showed that the economy has stayed away from recession.

Stocks in the US were up last week for the second consecutive week. The Standard & Poor's 500 Index rose 6.0 percent to close at 1,224.58 on Friday, its highest level since 3 August. The index has surged 11.4 percent since its recent low on 3 October. The market decline had looked on the verge of being declared a bear market that day after the S&P 500 closed at 1,099.23, 19.4 percent below its closing peak of 1,363.61 on 29 April.

European stocks also rose last week, their third consecutive week of gains. The STOXX Europe 600 Index rose 2.8 percent to close at 238.51 on Friday. The index has gained 11.0 percent since its low of 214.89 on 22 September but remains 18.1 percent below its peak of 291.16 on 17 February.

Asian stocks also rose last week. The MSCI Asia Pacific Index rose 3.4 percent to close at 116.82 on Friday. The index has gained 8.8 percent since its low of 107.35 on 5 October but remains 17.0 percent below its peak of 140.82 on 5 February.

The improved risk appetite among investors extended to commodities. The Thomson Reuters/Jefferies CRB Index of commodities rose 4.5 percent last week.

Investors remained mostly focused on developments on the European debt crisis. Concrete action to resolve the crisis was actually limited apart from ratification of a strengthened European Financial Stability Facility by Slovakia, the last country to do so. Still, the euro was able to rise 3.8 percent last week against the US dollar to $1.3882 and 4.4 percent versus the yen to 107.20 yen.

Improved investor confidence is likely to spill over into improved consumer confidence. So far, though, there is little evidence of that in the US, the Thomson Reuters/University of Michigan preliminary index of consumer sentiment actually dropping to 57.5 in October from 59.4 in September according to a report last week.

Still, weak consumer confidence does not appear to have affected actual consumer spending in the US too much. An economic report last week showed that retail sales rose 1.1 percent in September, the most in seven months, after rising 0.3 percent in August. Excluding autos, gasoline and building materials, retail sales rose 0.6 percent, the most since March, after rising 0.4 percent in August.

The strong retail sales report for September, which comes after positive purchasing managers' data the week before (see "Global growth held up by US but outlook still weak"), very likely means that the US economy avoided recession in the third quarter. Whether it can continue to avoid one is another matter.

The Economic Cycle Research Institute’s weekly leading index, which has been deteriorating over the past few months, fell again last week. The weekly leading index declined to 120.2 in the week ending 7 October from 120.5 the week before. The annualized growth rate fell to minus 9.6 percent from minus 8.7 percent.

Weak leading indicators do not bode well for the economy. However, the stock market is also a leading indicator and the recent turnaround in stocks provides some hope that a recession may yet be avoided.

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