Monthly Archives: March 2012

We’ve had some questions and good comments regarding our belief that we may be in for some sort of consolidation ahead for stocks.   Cyclical bull markets have, historically, encountered turbulence after about 6 1/2 months to a point approximately 9 months out.  For the current cycle, that translates to a span from mid-April to July.  The median maximum decline during the second six months of a cyclical bull market has been –6% and the median drop has lasted 29 trading days.

And as we’ve said before, stock market risks have tended to be concentrated in the first half of election years. The largest decline has started before July in 15 of 21 cases (71%).  The past 21 election years have seen a median maximum correction of –9% (lasting 44 days) between March 1 and election day.  The correction has been less severe when the incumbent party has won the election (median has been –8% versus –10% when the incumbent party has lost).

Early indications of a consolidation phase, including excessive optimism, are already evident.  Additionally, new highs in the major benchmarks have not been confirmed by our breadth indicators. 

All that said, our primary indicators still remain on “buy” signals, and we believe that the upcoming consolidation, should we be correct, will be on the milder side. – Stacey Wall

February’s payroll report suggested that the labor market is growing at its fastest pace in six years. Both nonfarm and private payrolls beat consensus estimates. Nonfarm payrolls showed gains of 227,000 jobs, while private payrolls grew by 233,000. December and January figures were both revised up from previously reports. Weekly jobless claims came in below the 400,000 level at 362,000. The four week moving average is now 355,000, the lowest level in four years.

Stocks responded well to this data, moving back up to their mid-2011 highs. Since the October lows, the S&P 500 is up just under 30%. Based on Pinnacle Trust’s 2012 forecast of 1450, we still see more upside in stocks this year. However, we did also suggest there would be a 10% correction sometime around the second quarter, so be cautious with new capital.

The employment rebound continues to strengthen, but the finish line remains far in the distance. 5% has long been considered “full employment,” and due to an increase in the participation rate (more people entering the workforce), the unemployment rate remains at 8.3%.

The economy continues to recover for the time being, and a cyclical bull market continues in the stock market. Remember that there is a $1.2 trillion federal deficit that still needs to be addressed. Much of the recovery we have seen can be attributed to the government and Federal Reserve’s intervention in the economy.

Until next week,

Jeremy Nelson, Chief Investment Officer