To be sure, the economy is still in healing mode.  As we wrote in our last update, although the domestic economy is performing at a higher level so far in 2012, when you consider how bad things were in 2008, we are still just working to emerge from the deep hole known as recession.  This is not to downplay the improvement we have seen thus far, but it is to remind our clients that 2012 will likely still be a rough year with low points and periods of slow or almost no growth.  

That being said, this year, so far, has witnessed nothing short of a seemingly never ending equity market rally. However, as we have seen many times in the past, including in 2008, the stock market is not acting in line with how the economy is performing.  In other words, stocks have managed to act independently of some areas of unimpressive economic data, especially globally.  It is likely that eventually the two will catch up with each other, and it might be the stock market falling in line with economic data and a still high fear gauge.  However, it could also swing the other way, and consumer sentiment and confidence, and in turn spending, could be boosted by a rallying stock market.  It seems that the quarter so far has been marked by domestic success temporarily taking precedence over the euro zone crisis in investors’ minds.

According to International Strategy & Investment (ISI) research reports, the last week in February wrapped up as the 22nd consecutive week of stronger US economic data, including unemployment claims, vehicle sales and production, consumer confidence, and ISI homebuilders survey.  More specifically, the unemployment rate so far in the first quarter of 2012 is .4% lower than the average of 2011’s fourth quarter.  Unemployment claims, if they stay consistent with how they’ve been thus far, will drop by 30,000.  February saw motor vehicle sales at their highest level since March 2008.  

However, in a more realistic tone, oil prices have risen dramatically.  The surge in crude prices will mean much higher prices at the pump than Americans have been used to lately.  We are unsure of the effect this will have on the automotive industry and auto sales, in particular, but history unfortunately shows us that over the past 10 years, there has been a severe 50% negative correlation between gas prices and motor vehicle sales, where when gas prices go up, motor vehicle sales go down, according to economist David Rosenberg.  Further, there is concern surrounding a possible Israel/Iran conflict over Iran’s nuclear program.  If a military conflict did occur, it would have an enormous impact on the global oil supply, and in turn oil prices, since Iran is such a prominent supplier of crude.  

In addition, bank loans have slowed dramatically, which is not a positive development for the economy.  Real consumer spending, also flat, is contributing largely to poorer than would be expected real GDP for the first quarter at 2.0%, considering other positive data. 

Despite stated reasons to be hopeful, the euro zone and the global outlook are still as worrisome as ever.  Although your ears may be ringing from warnings and, at times, dire forecasts about the euro zone, we unfortunately don’t foresee that changing in the near future.  At the end of February, the IMF stated its belief “that the world economy ‘is not out of the danger zone,’” as summarized by Rosenberg again.  The ECB continues to expand its balance sheet, but without lending in full swing.  There are still many signs of recession from countries such as Italy and Spain.  We stay tuned for many developments to come on the global scene.