The Dow Jones Industrial Average has retained most of the nearly 1,300 points it gained after bottoming at 11,740 on March 10th, buoyed by a substantial improvement in credit markets in recent weeks, as well as with the notion that upcoming increases in consumer spending stemming from tax rebates will bolster the U.S. factory sector, the sector that dominates the economic calendar.
In this context it is notable that the most recent decline in equity prices, which shaved about 300 points off the Dow after it peaked on May 6th, was rooted in none of what has ailed equities prices since last summer, most notably the condition of the credit markets. This means that the sell-off was ordinary; a run-of-the-mill consolidation of recent gains worthy of dip buying, at least for now.
As for the improvements in credit markets I mentioned, a glaring one is bond issuance, which has been extraordinarily robust. In fact, in two of the past four weeks bond issuance ranked the highest ever. Even junk bond issuers are having an easier time these days, selling more bonds in the week ended May 9th than at any time since last November. Certainly, with facts like these, a stall in the equity rebound had very little if anything to do with the credit markets.
Also, picture this: an ISM index (the monthly factory index released by the Institute for Supply Management) that goes back above 50, the level that represents the dividing line between expansion and contraction in the factory sector. Picture the mood at 10 a.m. when the ISM is released on the first business day of the month in one of several months ahead. How will the ISM index get get back above 50? Well, one glance at the correlation between the year-over-year change in chain store sales (as measured by the International Council for Shopping Centers) and the ISM makes it obvious that if the tax rebates succeed as they are likely to in boosting chain store sales to a 3.5% gain or higher (3.5% is a normal level), the ISM will likely move higher.
Giving confidence to this idea is the lean level of business inventories, which will compel businesses to raise output if sales pick up.
This is the story as it stands today; conditions could change by the summer, but it seems likely that the current situation is likely until the end of June, probably into July when there will be a chance to reassess.
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Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the co-author of the just-revised "The Money Market" and "The Strategic Bond Investor."