Perhaps The Markets Are Finally Reflecting What Many of Us Have Known All Along

Let’s open with the overproduction of crude oil and use that as a factotum for all commodities. The world is not producing too little but too much of almost everything. (The exception might be pharmaceuticals, health services and housing materials.) Thus, we have low or declining prices in most raw materials.

If you consider “money” to be a raw material, that, too, is astoundingly cheap. The 10-year bond yield in Japan is about 1/3^rd of a point. In Germany, it is about 6/10ths of a point. And in the U.S. the 10-year is hovering at about 2.00%. Of course, that means that consumer and commercial interest rates are low, although the pool of individuals and businesses able to access the felicitously low rates is small.

Bu the low interest rates in the U.S., at least, are encouraging more home purchases at higher prices. The counterpoint is that new construction is lagging because it is hard for small contractors to get the credit they need and the entry-level buyer is having a hard time getting a mortgage.

Nevertheless, housing prices are one of the few inflationary factors out and about in the economy.

Nothing is gained by recapping what has happened to the equities markets in the last few months. We know the sharp correction all too well. Goldman revised their target for the S&P 500 down from 2100 to 2000 for the remainder of the year.

But this is a correction with a purpose, it seems.

Consumer spending has been flat except in few sectors (auto buying, home improvement) even though consumer sentiment has been strong.

http://www.bloomberg.com/news/articles/2015-09-29/consumer-confidence-index-in-u-s-increased-to-103-in-september#media-1

There are abundant job opportunities in the U.S. economy and the price of gasoline and home heating oil adds to the buoyant feeling among consumers. The Conference Board survey reflects the period from August 18th to September 17th.

The firmer labor market may have helped to ease worry stemming from stock-market volatility. Through yesterday, the S&P 500 was down 8.8% in the third quarter and almost 12% below its all-time high set this past May.

When the drop in share prices is factored in to consumer sentiment, as it is in the University of Michigan’s consumer sentiment survey, people’s attitudes are much more negative about the future. Most consumers who feel unsure about the future understand (even if vaguely) the connection between a stock’s share price and revenues/earnings.

But, if we see the country at large adjusting to less bubble-ish equities prices and see those same people shaving down their concerns commensurately, eventually a clearer snapshot of how America feels about tomorrow and tomorrow and tomorrow.

There is a lot of gloom and doom out in the field at the moment. But the Cassandra contingent will have to back off once October is done with and the holidays burst upon us, and the cash registers start ringing.

Wishing you as always, good trading,