Fiscal Cliff or Not, the Economy is Recovering
Like the planes circling the airport in the holding pattern waiting for permission to land, the stock market is waiting for the fiscal cliff outcome. But not all of it. Several important stocks and sectors have been steadily rising last month as if they already know that the future is bright.
The Financials have risen in double digits since the November 14 lows. Bank of America BAC is up 28%, Morgan Stanley MS up 19%, Goldman Sachs GS is up 14%.
This rise could have been predicted (see charts below). Will they keep rising? We don’t know yet. As of today there is no signal, and the average predictability is falling. The system is waiting for the fiscal cliff resolution.
But before you conclude all is well, please take note of the worrying chart on the Zero Hedge site that shows how the risk of the main banks is rising again. Remember that the crisis of 2007-2008 started in the finance industry. Did they learn a lesson, and which is one? That the banks can rely on the government to save them from their mistakes at the taxpayer’s expense? If this is the lesson, then we all need lots of luck.
Here’s how you could play BAC:
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The rest of the economy
OK, the banks have risen. But what about the rest of the economy?
How about the real estate, the make or break indicator of the health of the economy RMZ, DJR? It’s up 6%. Home prices rise for 9th straight month. And the basic materials that go in home construction? The basic materials index is up 8%. Copper up 2%, Chemicals CEX index up 9.6%, BASFY chemical company, up 20%, Airlines index XAL up 14%.
Are we that late in the economic cycle that the economy is bound to improve regardless of what the governments do?
What really drives the recovery?
Eventually the car breaks down and needs to be replaced, and so is the plant equipment in the plants still working. That is what drives the economic recovery. Time will tell whether this recent recovery is real. Also, one should realize that the US government does not yet control all the economy. Whether or not we fall from the fiscal cliff, the main effects will be where the government is most invested: the defense (4.9% of GDP), the social services: the welfare (35% of GDP), and the healthcare (15.2% of GDP). The rest of the economy will be only affected “second hand” through higher taxes and health care expenses.
The economy is recovering steadily, as indicated by the rising Real Estate index. We think the effects of further government intervention or dis-intervention in the markets will be limited. We expect next year the S&P500 will be better.
For now you can see how you could have played these markets. More charts here.