The Outlook for Fall 2010

In reading the US economic and financial news this weekend, I think it is certain that the impressive stock market rise since Mar. 2009 is almost entirely related to fiscal stimulus and ultra low interest rates. There is essentially no strength in fundamentals for large corporations especially in terms of revenue growth. For small and medium sized firms the prospects are grim.

Some believe that gains in the stock market are increasingly dependent on high frequency trading that takes a short-term orientation and overlooks fundamentals. Combined with the lingering fear that dark pools of equity exist, I feel that the outlook for Fall 2010 is weak in terms of any stock price appreciation or progress in economic growth. There are reports from reliable economists and analysts on Wall Street that Q3 will record negative GDP growth. Given the slowness of the Summer, I very much agree with this assessment.

It is possible that high frequency trading is elevating p/e ratios because of the widespread popularity of the practice. Perhaps if the approach accounted for less of stock trade there would be more realistic valuations. For example, the warning by Intel this week went largely unnoticed. In times when fundamental analysis played a larger role in trading, the Intel news would have been a major event driving down stock prices.

The widespread practice of high frequency trading could be creating systemic risk that is nearly impossible to gauge.

My view is that during the Fall stocks will experience a great deal of selling pressure. The Fed is out of meaningful policy actions and I believe the American public will not allow additional fiscal stimulus and a further increase in the national deficit. The apparent rise of extremism is an additional political worry. People what politicians that can make the economy better and reduce unemployment. I think this is a tall order for either political party as the options for the federal government seem limited.

Instead of blaming politicians, the public needs to go through a period of deep examination in terms of what is realistic going forward. The huge amount of fiscal pressure on cities and states will accelerate this dialogue. However, it is the public (not politicians) that will ultimately lift America from this period of slack economic growth.