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Standard & Poor's Weekly Investment and Economic Outlook


Fundamental Outlook

  • As of May 26, the S&P 500 was trading at more than 23X trailing 12-month operating EPS, 16.8X 2009E and 12X 2010 estimates. Even though the S&P 500 bounced nicely off of its early March lows, we believe the “easy money” has already been made, and future price advances will likely be more muted as valuations become increasingly stretched. Rich valuations may curtail further advances for cyclical sectors in the "500." Even though valuations look more plausible the further out you go, our confidence in these EPS projections is reduced.
Technical Commentary
  • The stock market is wrestling with the downtrend that started from the recovery high of May 8. The pullbacks by the S&P 500 have held support in the 875 to 880 area. On the upside, the key area of chart resistance is the recent high near 930. Just above that level, chart resistance sits in the 935 to 944 zone with the 200-day exponential average at 946. We believe that to extend the intermediate-term rally off the March lows, these pieces of resistance will have to be taken out. On the downside, however, the 875 to 880 area represents chart support. If that zone of support gives way, we believe a deeper correction will be in store.
  • Crude oil is attempting to break above its 200-day exponential average. If successful, we think it would open the door for a move up to the $70-$80 range as price momentum appears strong.
 Longer-Term Outlook
  • Housing starts and sales seem to be bottoming out. Record low mortgage rates and falling home prices have pushed the Realtors’ Affordability Index to a record high of 166 in April. Nationally, the average single-family house is estimated at 2.4X average Q2 2009 household income, versus an average 2.6X from 1960 through 2000. However, the need to get rid of excess inventory will probably drive prices even lower. We estimate the S&P/Case-Shiller Home Price Index will fall another 10% by early 2010, leaving it down 38% from its July 2006 peak.
IPC's Recommended ETF Allocation
  • Within equities, S&P's Equity Strategy Group recommends investors have a 45% exposure to U.S. equities and 15% exposure to foreign stocks.
  • Of the 45% U.S. equity exposure: 37% in large-cap blend (S&P 500 SPDR/SPY), 5% in mid-cap blend (S&P MidCap SPDR/MDY), and 3% in small-cap blend (iShares S&P SmallCap 600/IJR).
  • Of the 15% foreign equity exposure: 12% international (iShares MSCI-EAFE/EFA); and 3% in emerging markets (iShares MSCI Emerging Markets/EEM).
  • Of the total 40% fixed income allocation, we recommend a 20% holding in U.S. debt (iShares Lehman Aggregate/AGG), a 5% stake in U.S. short-term debt (iShares Lehman 1-3 Year Treasury/SHY), and a 15% in cash, or U.S. 6-month Treasury bills.
S&P Weekly Economics Call

United States
Home prices dropped 18.9% in March from a year earlier, according to the S&P/Case-Shiller Home Price Index. Prices were down more than 10% year over year (y/y) in all 20 cities in the Index. Sales of existing homes, however, rose 2.9% in April, to an annual rate of 4.68 million, according to the National Association of Realtors (NAR). The NAR also reported that the median sales price edged up 0.2% to $170,200 in April, which was still down 15.4% from a year earlier.
  • The Conference Board’s Index of Leading Economic Indicators jumped 1% in April, after three consecutive declines.
  • The Federal Reserve Bank of Philadelphia reported that manufacturers in its district saw a smaller deterioration in the business outlook in May, with the overall index rising to negative 22.6 from negative 24.4 in April.
  • The Conference Board survey of consumer confidence jumped to 54.9 in May from 40.8 in April. The consensus was for a slight improvement to 42.0. The index is now more than double its February low, and seems pointed toward a consumer recovery. Most of the improvement was in the expectations components, which rose to 72.3 from 51.0. Consumers’ assessment of current conditions improved only modestly, to 28.9 from 25.5.
  • U.S. jobless claims fell 12,000 to 631,000 for the week ended May 16. Continuing claims rose another 75,000 to a record 6.662 million in the week ended May 9. The insured unemployment rate rose 0.1% to 5.0%. The largest increase was once again in Michigan, suggesting that the Chrysler bankruptcy continues to dominate lay-offs.
  • The Canadian consumer price index (CPI) fell 0.1% in April and was up only 0.4% y/y. The core rate was up 1.8% y/y.
  • The Canadian leading indicator fell 1.1% in April.
  • Canadian wholesaler sales fell 0.6% in March, while wholesale inventories were unchanged.
  • Canadian retail sales rose 0.3% in March, but fell 0.2% excluding autos.
  • Crude oil climbed another $3 to $63 (week-over-week) on Wednesday; a six-month high, after Energy Information Administration inventory data showed another 315,000-barrel drop in crude stocks. There was a sharp drop of 4.3 million barrels in gasoline stocks, but this was offset by a 5.0-million-barrel increase in other oils. Total products supplied were down 7.6% from a year earlier, reflecting lower demand.
  • Bond yields rose 32 basis points (bps) to 3.71% through Wednesday on stronger economic reports. Mortgage rates rose 12 bps to 4.81% for the week ended May 15. Mortgage applications plunged 14.2%. Purchase applications rose 1%, but refis plunged 18.9% because of the higher mortgage rates.
  • Upcoming reports: Durable orders (5/28, 0.4%), Initial Claims (5/28 635k), New home sales (5/28, 365,000), Real GDP revision (5/29, -5.6%), Michigan consumer sentiment (5/29, 68.2), Personal income (6/1, -0.1%), ISM manufacturing (6/1, 41.7), Light-vehicle sales (6/2, 9.4), Factory orders (6/3, -0.4%), ISM nonmanufacturing (6/3, 45).
 

Japan and Other Asia/Pacific
Japanese retail sales plunged 3.6% from a year earlier in April, increasing worries about a longer and deeper Japanese recession.

  • Japan’s tertiary index plunged 4.0% in March, much worse than expected. The all-industry index fell 2.4%.
  • Japan’s leading index jumped 1.9% in March, while the coincident index edged down 0.1%.
  • Japan’s trade balance rose to 69 billion yen in April from 11 billion yen.
  • Upcoming Japanese reports: CPI (5/28), Unemployment (5/28), Trade balance (5/28), Personal income (5/28), Housing starts (5/29), Construction orders (5/29), Auto sales (6/1).

Europe
European (EU-15) consumer prices fell 0.1% in April and were also down 0.1% y/y. Germany’s April CPI fell 0.15%.
  • The European purchasing managers’ index rose to 43.9 in May from 41.1. Manufacturing rose to 40.5 from 36.8, while services edged up to 44.7 from 43.8. The German IFO business climate survey edged up to 84.2 in May from 83.7. The French production outlook improved seven points to negative 50 in May.
  • U.K. retail sales rose 0.9% in April. Italian retail sales edged up 0.1%. French consumer spending on manufactured goods rose 0.7%.
  • U.K. gross domestic product (GDP) was revised to a 1.9% drop in Q1 2009. German GDP was confirmed at negative 3.8%.
  • The European current account deficit narrowed to €6.5 billion in March from €8.1 billion in February.
  • French consumer confidence edged up to negative 40 in May from minus 41. Italian consumer confidence was flat at 104.9.
  • European industrial orders fell 0.8% in March, following a flat February. Orders were down 26.9% from a year earlier.
  • Upcoming reports: ITA Bus confidence (5/28), Ger unemployment (5/28), EU PMI and consumer confidence (5/28), UK durable orders (5/28), GER retail sales (5/29), FR PPI (5/29), ITA PPI and CPI (5/29), EU CPI (5/29), EU Reuters PMI (6/1), EU Reuters services PMI (6/3), EU PPI (6/3).

 

 

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