People are by nature optimistic. This point is underlined with each reset of the calendar. The can-do spirit, best exemplified in personal resolutions, mostly of the diet and exercise variety, is fresh in everyone’s mind. Likewise, the feeling that better times are on the way is reflexive. This psychology is at least partially behind stocks’ tendency to rise in the early part of the year. Strong stock market returns in year just ended certainly don’t hurt either.
So it’s not surprising that we started the trading year off with a bang yesterday. Further signs of strong economic growth in emerging economies, namely China, plus an improvement here in the U.S. in the Institute of Supply Management’s Manufacturing Index and with factory orders have helped to bolster investor confidence.
Less than bullish readings yesterday on construction spending and today’s surprisingly large decline in November pending home sales, which dropped 16 percent in contrast to expectations for only a 0.2 percent decline, have largely been ignored.
Stocks should continue to have an upward bias for the near term, although positive returns are by no means a slam dunk. There’s plenty more economic data due out this week, but the real bellwether for the U.S. economy will be the employment numbers to be released on Friday. A surprise reading either way could set the tone for the market for weeks to come.
Longer term, the economy stands at a critical juncture: Despite the recovery in stock prices since last March we remain balanced between deflation and inflation. Despite near-zero interest rates, banks still aren’t lending to any great degree. Consumers, meanwhile, faced with a weak housing sector and anemic employment situation, are focused on repairing their balance sheets and not inclined to spend. And corporations are in no position to raise prices even though they’re confronted with rising input prices.
Should the U.S. economy backslide rather than recover from here, stocks would retreat and we could well be faced with another wave of deflation. On the other hand, should the economy accelerate and banks start lending again, the trillions of dollars in excess liquidity sloshing around could quickly translate in high and rising inflation.
Resource scarcity, meanwhile, threatens to make this situation worse. China’s voracious appetite for raw materials to fuel its growth, along with its push to develop alternative energy is resulting in rising prices for industrial commodities and crude oil. Those increases will act as a tax on the U.S. economy and could derail the recovery.
Our top trading and investment picks for the year ahead will continue to center on precious metals and related miners as the metals offer protection against either inflation or deflation.
On that score, a number of technical indicators we look at for gold are generating buy signals right now. While we still won’t rule out further consolidation, the near-term trend is more likely to be bullish.
