November 28 Market Summary

Today equity markets rallied around the world on Friday and appear to be forming support at current levels.  However, we are still waiting for a turnaround in the economic picture: unemployment is rising, and the supply of housing is still at record highs.

Rising unemployment doesn’t bode well for consumer spending

Expectations for unemployment reached highs not seen since 1980.  Since U.S. consumer spending is 70% of the economy, we believe that rising unemployment still has the potential to lead to an economic slowdown, and we are steering clear of consumer discretionary stocks.

Supply of housing is also at record highs

The supply of housing has risen to levels not seen since 1980 as well.  68% of the public in the U.S. already own their own home (compared to 64% for the norm), so there is not much pent-up demand for housing at this point.  Higher house prices in the short-term are unlikely with inventories so high, thus reducing a “wealth effect” that would otherwise boost consumer spending.

 Potential bright spot: defense spending

After years of decline, defense spending as a percentage of GDP has finally turned around.

There is an Aerospace and Defense Index that encapsulates all the stocks in this sector in one single stock.  We note that this stock has begun to show signs of support, in line with the above trend.  You can’t go wrong betting on human conflict!

We were saddened to hear that a Wal-Mart employee died today after getting trampled by a crowd looking for good deals.  Wal-Mart has done well this year, as people have flocked to its low-price stores.

We have also observed that the new Shipping Index has begun to show some strength, perhaps indicating that all of the negative news in the economy has been priced into the markets already.  Shipping is a leading economic indicator, meaning that strength in this sector could indicate stronger economic growth going forward.