Consumer Confidence Remains In An Uptrend

Although today's consumer confidence report indicated a worse than expected decline to 63.4 versus the expected 65, the index remains in an uptrend. The part of the index that measures how consumers currently feel about the economy improved to 36.9 from 33.8 in February. It would be highly unusual for the index to move higher each and every month. As the below chart shows, consumer confidence and the market's performance are linked at the hip given the consumer's importance to economic growth.

From The Blog of HORAN Capital Advisors

The Dow Remains In Long Term Uptrend

The below chart analysis by Chart of the Day shows the inflation adjusted Dow remains in a long term uptrend. Will it continue to advance to the upside?

For some long-term perspective, today's chart illustrates the Dow adjusted for inflation since 1900. Of interest is that the inflation-adjusted Dow has traded within the confines of an extremely long-term upward sloping trend channel over the past 111 years. It is also of interest that the secular bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. Also, while the market action from the inflation-adjusted record high of 1999 to the financial crisis lows of 2009 was severe, the magnitude of this decline was much less than what occurred with the bear markets that concluded in the early 1930s and early 1980s. More recently, the Dow has retraced 74% of the financial crisis bear market with the inflation-adjusted Dow currently trading 19% off its 1999 record high -- a rather dramatic turnaround considering the magnitude of the recent financial crisis.

From The Blog of HORAN Capital Advisors

Source: Chart of the Day

S&P 500 Index Short Term Oversold

The recent decline in the S&P 500 Index has resulted in the percentage of stocks trading above their 50-day moving average to decline to 38%. This is down from over 85% just a few months ago. The percentage trading above their 150-day moving still remains elevated at 80%: however, the market's recovery on Thursday and Friday last week pulled these percentages higher and could be indicative of a continued recovery in the market.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

Investors need to be mindful that these are simply technical indicators and support for the market is around 1,230 for the S&P 500 Index.

From The Blog of HORAN Capital Advisors

Investor Bullish Sentiment Suggesting Market Move To The Upside

One aspect of the individual investor sentiment reading is it tends to be more predictive at extreme reading levels. In that regarding the American Association of Individual Investors reported that this week's individual investor bullish sentiment reading was 28.49%. This is the lowest bullish sentiment level since August of last year when the bullish sentiment level was reported at 20.74%.

From The Blog of HORAN Capital Advisors

Several external factors are undoubtedly impacting investor sentiment at this point in time, i.e., instability in the Middle East and fallout from the earthquake in Japan. The issues in Japan, especially the nuclear crisis, will likely be resolved one way or another within several weeks. The instability in the Middle East will most likely be an ongoing factor that influences market volatility.

At the end of the day, company fundamentals continue to remain attractive. Attractive valuations and low levels of bullish sentiment are suggestive of a market rebound near term.

The Market and Nuclear Crises

The tragic events in Japan are having an impact on market activity over the past several days. The issues surrounding the reactors at the Fukushima Daiichi power plant make new headlines throughout the day. As the below graphic shows, the S&P 500 index has contracted during past nuclear crises. The largest impact was Chernobyl in 1986 and the trough was reached 14 days after the Chernobyl event. The market recovered its losses within 20 days of the Chernobyl accident.

From The Blog of HORAN Capital Advisors

Source: Reuters, by author Ben Berkowitz

The nuclear crises events in Japan are certainly far from over; however, history seems to indicate the market has a tendency to overreact to these events in the short run.

Gold And Silver Used In Evaluating Direction Of Economy

Given what seems like a parabolic increase in gold and silver prices, many investors are attracted to these metals as investment opportunities. At HORAN Capital Advisors, we have a difficult time evaluating whether these metals are overvalued or undervalued. The difficulty arises from the fact these metals do not generate any cash flow. At HORAN, we value investments we make for our client accounts based in large part on the cash flows generated by particular investments. Consequently, at this point in time we do not have a direct allocation to either gold or silver for our client accounts.

On the other hand, we do evaluate gold and silver prices as they are an important input into our analysis of the future direction of economic growth. Gold tends to be a safe haven investment for investors with events like those occurring in the Middle East impacting the price of gold. During times of improving economic activity though, silver tends to outperform gold due to silver's wider industrial use compared to gold; hence, driving up the price of silver. Since mid-2010 silver has outperformed gold. The first chart below shows gold and silver prices along with the gold/silver ratio. In the second chart, the gold/silver ratio is plotted with U.S. industrial production.

From The Blog of HORAN Capital Advisors

From The Blog of HORAN Capital Advisors

As of March 11, the gold/silver ratio stood at 39.3 and this is below the support level of 43 that has held since February 1998. Additionally, the above chart that includes industrial production shows a declining ratio along with improved industrial production activity. For investors then, if they want to use gold and silver prices as an input in their economic forecast, evaluating the gold/silver ratio can be a useful indicator to track.

Source:
Gold and Silver: What a Pair! ($)
Thomson Reuters
By: Radhika Kamath
March 10, 2011
http://www.trpropresearch.com/archive/file/952/

Oil Price and GDP Calculator

Reuters has produced an interactive calculator showing the impact on global GDP of oil prices at various levels. Click the below chart for the link to the calculator.

From The Blog of HORAN Capital Advisors

Employment Report: Watch Participation Rate

Today's Bureau of Labor Statistics release of the employment situation report saw the unemployment rate decline to 8.9%. This rate was better than the consensus expectation of 9.1%. Today's stock market reaction to this supposedly improved report was less than positive. Aside from the heightened focus on oil prices, the report was not as positive as it may have seemed on the surface.

One factor in the report worth watching is the participation rate. As the below chart shows, the participation rate has been on a steady decline since the end of the recession in early 2009. This rate has fallen to 63.9% and is below the 66.8% just prior to the beginning of the recession. An improvement in the unemployment rate could be the result of more individuals not pursuing jobs and dropping out of the labor force since they are unable to find employment.

From The Blog of HORAN Capital Advisors

h/t: CNBC

Oil Price Spikes Often Preceded Or Coincided With A U.S. Recession

According to Chart of the Day:

"The decline in crude oil prices that began in mid-2008 was historic -- plunging over $90 per barrel in just eight months. Over the past two years, however, crude oil prices have increased by over $60 per barrel. Today's chart provides some perspective on the historic decline and recent spike with a long-term view of inflation-adjusted West Texas Intermediate Crude. Today's chart illustrates that most oil price spikes were a result of Middle East crises and often preceded or coincided with a US recession. It is also interesting to note that the recent spike in oil prices has brought the price of oil back to a historically high level -- a level that was surpassed only briefly during the tail-end of the major price spikes of 1980 and 2008."

From The Blog of HORAN Capital Advisors

Source: Chart of the Day

Pickens On U.S.'s Energy Situation

Feb. 28 (Bloomberg) -- T. Boone Pickens, the billionaire chairman of BP Capital LLC, talks about the impact of turmoil in the Middle East on oil prices and the need for new U.S. energy policy. He speaks with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)

From The Blog of HORAN Capital Advisors