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My tech stock "safe" signal is still stuck at 0.0 since none of the major tech companies is yet publicly claiming that they have evidence (other than "hope" or "hints") that their business has started to accelerate out of the tech downturn. My "safe" signal requires at least 20% or 1 out of 5 of the top 25 tech companies to signal acceleration. Expect at least two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally six months in advance of the return of strong growth. Despite recent events, I continue to peg Q2 (May or June) of 2002 as the timeframe for the return of relatively strong growth for the bulk of the tech sector.
Current short-term economic outlook: Recent events will cause a sharp drop in economic activity, but those effects may be short-lived as pent-up demand needs to be satisfied. The economy will be completely up in the air until mid-October. November and December may show the beginnings of recovery, but only to the extent that the "response" to terrorism does not continue to drag down the economy. To get the "pulse" of the economy, focus on employment, income, and advertising spending. The government issues unemployment numbers every Thursday. But, don't waste time with these numbers until about mid-October after the new wave of layoffs subsides.
Tuesday's market action reflected a deep disagreement as to whether it's okay to focus on the longer-term outlook yet or whether we still need to be in pain over the near-term devastation. But at least we can be thankful that there was not another wave of selling.
The Conference Board Consumer Confidence Index fell sharply in September. Even worse, most of the survey was done BEFORE September 11. Consumer "expectations" are lousy, but it is known that the media heavily influences those expectations. On the other hand, consumers have direct experience to guide their perception of their "present situation" and that part of the index is still relatively high despite also declining in September. Overall, this is a negative report and may get worse before it gets better. Consumers will need to see some real progress in "The War on Terrorism" before they gain confidence. The market was probably relieved that the decline was not even worse.
The Existing Home Sales report for August was very positive, but that's ancient history. Cheap mortgages have kept demand high, but recent events will negatively impact near-term demand. The extent of the impact is very uncertain. Once we get past the middle of October we'll start gaining visibility.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell 5.95% on Tuesday to 38.87, which is now down in the very high anxiety zone rather than being up in the panic zone. This is a notable improvement, especially considering that the market was so "confused" (volatile) yesterday. VIX fell sharply on the open and continued down to its low of the day at around 11:45 a.m. VIX did rise as the market fell sharply after that, but even at the market low at 2:00 p.m., VIX was still way down from Monday's closing level. That's a very good sign. As the market rallied after 2:00 p.m., VIX retreated in an orderly manner and closed not too much higher than its low in the morning. Overall, Tuesday was a really solid day for VIX, especially given the lousy consumer confidence report.
The Nasdaq-100 After Hours Indicator bounced around during the Tuesday evening session but managed to keep a slightly positive bias, closing up 0.29 points. That's not what you'd call "exuberance", but it certainly suggests stabilization. And maybe just relief that there was not a massive wave of major warnings.
I'm suspecting that given the tremendous uncertainty inspired by recent events, most companies will prefer to wait until the September quarter is virtually complete before warning. No sense giving a warning that's likely to be way off. For the rest of the week everybody will be scrambling to close any and all possible business. I'm not hopeful, but we can hope that the market will "understand" the impact of recent events and project that a lot of the September business will be merely pushed into October.
Fed Funds futures responded to the lousy Consumer Confidence report and suggest a certainty of a quarter-point cut in interest rates at the October 2 FOMC meeting as well as an 84% chance (up from 80%) of a half-point cut at the meeting. But a half-point cut by the end of the year is a certainty. Futures also suggest a 96% chance (up from 72%) of three-quarters of a point (total) cut by the end of the year. The likely scenario is a half-point cut at the October FOMC meeting and then an additional quarter-point by the end of the year.
Are we in recession yet? Probably. The economy may continue to decline in November and December, but a steep enough decline now through October may leave us in such a negative position that at least a slight improvement is likely in November and December. Demand does not disappear, it just gets pushed out. So if you push enough demand out of September and October, that pent-up demand will tend to assert itself quite rapidly unless there are further dramatic shocks.
It is difficult to say what percentage of market participants have their minds wrapped around the totality of the economic outlook. It's all still a "work in progress". We could well see more selling, but we may also be getting near the far side of the inflection point and be ready to focus on where the economy will be six months from now when all the "stuff" is behind us.
There is talk of a "significant" government stimulus package. Even $100 billion is just a drop in the bucket (1% of annual GDP), so it's not something to get real excited about.
With consumer confidence "flagging" (imploding??), all we can hope for is that businesses decide that the time is ripe for them to ramp up capital spending to get ready to capitalize on the economic growth that is likely on the other side of the current mess (i.e., six months out).
The administration is still not speaking with sufficient clarity about its "game plan" for "The War on Terrorism". Of late, the Pentagon seems to be suggesting that there will not be any large, dramatic, visible confrontation in the near-term. I'm still expecting that the "long term" part of the "war" is primarily a low-intensity "policing" effort with covert "activities" and occasional "surgical" strikes, not unlike what we have been doing with Iraq for ten years now. Expect to see a lot of "secret support" for "opposition" groups in places like Afghanistan and Iraq. There's not yet any reason to assume that the "war" will be a heavy burden on consumer confidence in the long run.
Jack Krupansky
Updated: September 25, 2001 11:45:34 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology