| U.S. equities are playing catch-up to the appreciation in many |
other risky assets, although they still have a long way to go
to reach their mid-September 2008 levels (i.e. pre-Lehman).
The S&P 500 climbed above its 200-day moving average last week.
The psychological impact of slicing through this technical barrier
could convert many bears to a more bullish persuasion. At this
point in past cycles, sentiment had usually become more optimistic
than is currently the case. It is remarkable that after a nearly 50%
rise in share prices from the low, the number of bulls in the trading
pits remains so low. Consequently, there are good odds that the
index will continue to grind higher as economic confidence is slowly
restored and investor conviction in a sustained profit recovery climbs.
Still, it is important to keep in mind that this cycle is very different
because the U.S. is in a balance sheet recession and suffers from
questionable asset quality, rather than an income statement
problem stemming from higher interest rates. In terms of economic
variables, only the ISM new orders index is following a typical post
-bear market rally path. Employment conditions are worse (albeit
layoff announcements have rolled over and the pace of job
shedding has slowed) and house prices are much weaker. This
reflects the unique nature of the downturn and overall financial
Bottom line: Equities have more upside, although the recovery
may be more muted than in past cycles and more narrowly-based.