The Economic Clunkers of Autumn

Back-to School sales weren't so good. Factory Orders were weak. Auto sales plummeted. Non-Farm Payrolls were much worse than expected. We have been concerned for months that investors were too bullish with the signs of green shoots. The economy almost fell off a cliff a year ago and stocks were plunging in the spring so it was not a huge surprise to see the stock market rally when the economy showed some signs of a slowdown in the economic decline. The rally persisted as business seemed to not be getting worse but stocks may have over shot on the upside as they did on the downside.

It is only in the last two weeks where stocks have taken a little breather as the green shoots are starting to look like weeds. It is not really a surprise to see auto sales fall last month as the cash for clunker program ended. The stimulus plan gave a shot in the arm to the auto industry by creating bargains for consumers to trade in their old cars. With those bargains gone, there aren't many buyers of new cars. The same result is likely to happen to housing next month as the governments subsidies for first time buyers go away. Anyone looking to buy a house surely took advantage of the stimulus plan but once that ends so will aggressive buying of new homes. We expect the government to extend the housing stimulus or creat another boost for housing. However, a continuation of the plan will unlikely produce the same jolt to housing sales as anyone who wanted to take advantage of a subsidy likely did already.

The consumer is still weak and appears to only be looking for bargains. Debt remains high in all sectors of the economy with the commercial real estate troubles just getting started. Financial institutions still are not lending to small businesses, a primary source of economic growth and new job creation. The recession may be over but economic prosperity is a long way away. As such, stocks will likely begin to recognize this reality.