2Q Update – 5/15/2012
This May marks the third anniversary of the Bedel Barometer. Back in 2009, we identified key areas that have historically been strong indicators of the strength in the U.S. economy. The idea was to use these indicators to determine whether the economy was going to rebound or remain in crisis mode in the year ahead.
In the short run, the Bedel Barometer should be used as a measure of the overall health of the U.S. economy—not as a sign of the health of the stock market. In the long run, the health of the U.S. economy should have a significant impact on the performance of the stock market.
Since its inception, the Bedel Barometer has consistently had a positive score, suggesting the economy was initially moving toward growth and then sustaining that growth. Today, the score is +4, which suggests a continued path of moderate growth.
This is how each indicator stacks up today:
Manufacturing Activity - Positive. Manufacturing activity numbers have continued to show growth. In addition, future order numbers are strong, and inventory rebuilding has been suppressed. This has been consistent for a couple of years now.
Consumer Price Stability - Positive. We are not seeing deflation or accelerating inflation, so this input is considered positive. However, the high price of oil could have an impact on inflation over the next few months.
Stock Market Performance - Positive. As of this writing, the Dow Jones Industrial Average was near 13,000—an impressive rebound from last year’s Summer/Fall downturn which took the Dow below 11,000. The stock market tends to be a leading indicator of economic growth, so its positive rating is good news.
Consumer Spending - Positive. Consumer spending has been solid. Over the past months it has increased 0.2%, 0.0%, 0.2%, 0.4% and 0.8%. Since consumption represents more than 70 percent of the GDP, this metric is another important indicator.
Housing Market - Negative. There are signs that the housing market downturn may have bottomed out and we could be headed for a healthier market in 2012. Until we see this materialize, we will keep our score at negative. Why? Bifurcation in the marketplace is likely to occur, and may have already begun. While prices will continue to soften for homes that have been dormant for some time, the higher demand for well-maintained homes may lead to price stabilization and potential increases for those homes. The cost of renting versus owning may also impact the market. According to the Census Bureau and J.P. Morgan, the median monthly cost of renting is $706, while the median monthly cost of a mortgage is $518. With rent being 36-percent higher than a mortgage, you would be correct in assuming that investors will ease into the residential rental business.
Volatility - Positive. For this indicator we like to watch the VIX, which measures the cost of buying insurance for stock protection (through options). When the cost of protection is high, volatility is usually high and the potential for declining stock values is higher. Today’s volatility reading is low but, ironically, this reading can be volatile. For now, the measure is positive.
TED Spread - Neutral. The difference between the Treasury’s cost of borrowing short-term money and banks’ cost of borrowing short-term money is the TED Spread. When the spread is significant, banks worry about being repaid when loaning money to other banks. The current spread had been increasing due to European debt issues, but it stabilized at the beginning of the year. The recent spread of 0.40%, while below the average spread of 0.6%, is still above the extremely low levels of early 2011. Even though the spread is low, the European sovereign debt issues will likely keep the spread higher than it otherwise would be. Therefore, we have assigned it a neutral rating for now.
That makes five positives, one negative and one neutral. While past performance is not a guarantee of future results, the current score for the Bedel Barometer is +4, which suggests modest growth in the foreseeable future.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly on this site will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Bedel Financial Consulting, Inc. Portfolio Managers. The opinions expressed are those of Bedel Financial Consulting, Inc. as of the date of publication and are subject to change at any time due to the changes in market or economic conditions.