Macro View...In Microwave Time (Part 1 of 2)

In today’s sound-bite, tweet-driven world, one can’t help but do all they can to keep it simple, keep it brief and resist the temptation many of us Baby Boomers have to fall prey to “paralysis by analysis.” With that spirit in mind, here is a quick, pointed update on the 13 key points for investors I laid out in an article in on January 14 of this year. These were and are the most significant data and forces for investors to track today, to pursue long-term growth and sidestep major losses. I will also note whether I think each point is a positive or negative (or other) for investors now that we are about 3/5 of the way through 2013. I will cover six of them this week and the other seven in next week’s post. Here goes…

  1. Sentiment (positive) – for a while, this seemed to be the one indicator I follow that was holding the stock market up. People were skeptical of this year’s rise, which historically is a good thing for future stock prices. The American Association of Individual Investors (AAII) weekly survey yesterday showed a remarkable drop of nearly 10% in “bullish” participants, bringing that indicator back into a more reasonable range. Just when it seemed that investors were forgetting about the downside potential of the stock market, they have a moment of clarity. We’ll see if this sticks. Note that this is one of many sentiment indicators worth watching.

  2. U.S. Misery Index (positive). This is the inflation rate plus the “headline” unemployment rate. If it is below 10, it’s a good thing. As of today’s report of U.S. monthly employment, the Misery Index is in the low 9s.

  3. U-6 Unemployment (mildly positive). This is one of the most meaningful indicators to me since it includes those under-employed or unemployed for a very long time. As of this morning it is down to 14.0% versus 14.4% at the end of 2012. Progress, but not fast enough for sustained economic growth as I see it.

  4. Stock market – trading range or true market move (U.S. – positive, Emerging Markets – negative). As discussed in previous blog posts, these two market areas have gone in opposite directions this year. Great to see the U.S. break out to new highs, even if it is largely the result of false hope driven by easy Fed money. At least you always have the choice to cash in. As for Emerging Markets (EM) – a horrible year, which is screwing up a lot of conventional wisdom. Conservative stock portfolios are doing better than many aggressive growth portfolios if the latter contain significant EM exposure.

  5. Correlation among stocks (positive) – that is, the degree to which stocks move up and down together. Using the CBOE S&P Implied Correlation Index as this indicator, I note that it is right near its low for the past 12 months. That is very good news for investors. Market tops often form when the market acts in unison. But that is not where we are now. This also dispels some of my own concerns that with so much investor money plugged into index funds and ETFs, stock-picking would be tougher. Heck, it is always tough, but this indicators offers hope that the four year bull run has a bit more life to it.

  6. Safe Haven status of the U.S. (positive but tenuous) – the U.S. has fought off challenges to its leading position in the world currency markets. But is it all just a smokescreen that will dissolve once the Fed’s efforts to prop up the economy dissipate? THAT is the number one worry for investors, as I see it. And we won’t know until it happens.

We’ll leave it there and finish the list next week. If you have any ideas about what you think should be on the list going forward, let me know. Later this year we plan to release for the first time a Sungarden index which will attempt to gauge the trade off between reward potential and downside potential for investors.

© Sungarden Investment Research

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