Tags: Stock | Market | Sweet | Spot

Analysis: Stock Market 'Sweet Spot' Won't Last

Tuesday, 03 April 2012 09:40 AM

The stock run since the beginning of the year is likely to soon come to a crashing halt, according to new analysis by money manager Comstock Partners.

Stocks are up nearly 13 percent on the S&P 500 since the year began and better than 90 percent from the lows of March 2009.

Investors have bid up stocks, but there also has been a constant tug-of-war between expectations of a third round of extraordinarily easy monetary policy and hopes for a real recovery, with both sides arguing that one or the other is imminent.

Editor's Note: Wall Street Insider: The System Is Rigged

Both cannot be true, points out Comstock in a note to investors.

“Equities have been in a temporary sweet spot where investors have been factoring in a self-sustaining U.S. economic recovery while also anticipating the imminent institution of QE3. This is a contradiction. If the economy were indeed as strong as they say, we wouldn’t need QE3,” the money firm writes on its blog.

Other factors have played role in the apparently brightening outlook, with varying degrees of reality backing them up, according to Comstock, including:

1. An apparent temporary resolution to the European crisis, which cannot be sustained.

2. A warm U.S. winter, combined with distortions in the comparative figures vs. the recent, deep recession.

3. The coming “fiscal cliff” of expiring tax breaks and the end of jobless benefits

4. A quirk in economics known as Okun’s Law, which suggests that U.S. Fed Chief thinks the gains in employment will moderate.

“The takeaway is that the unemployment rate will not improve much in the period ahead, an assumption that is undoubtedly a major reason for the Fed’s continued caution on the outlook and promise of near-zero rates into 2014,” Comstock maintains.

Whatever happens with stocks, spring has apparently sprung for housing. In a note cited by the Calculated Risk blog, Wells Fargo says that homebuilders are enjoying a renaissance as rates stay low and confidence in the economy builds.

“The latest data on home prices also came in a little better than expected, and the survey data from the NAHB/Wells Fargo Homebuilders Survey as well as anecdotal reports from builders and realtors all suggest better days are ahead for the industry,” the bank wrote.

“Drawing definitive conclusions from the winter housing data is perilous. The winter months account for the smallest proportion of the year’s housing activity, and unseasonably mild weather during the winter months can cause the data to bounce around quite a bit from month to month.”

“The March and April data are much more important, and all indications suggest that the key spring selling season has gotten off to a solid start,” Well Fargo said.

Editor's Note: Wall Street Insider: The System Is Rigged

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