David Rosenberg, the Merrill Lynch economist who will soon be moving to Gluskin Sheff + Associates in Toronto, has one response to the trickle to optimism in the market these days: Don't believe it.
Despite the 26 per cent bounce in the S&P 500 since early March, he believes that the index will fall to new lows before the bear market finally dies, possibly moving between 475 and 650 for an extended period of time. On Thursday, the S&P 500 rose to 838, up from about 666 in early March, in a move that has been heralded as the sharpest upward move in the stock market since the 1930s.
Mr. Rosenberg looked past some of the recent encouraging signs in the economy – most recently including modest increases in pending U.S. home sales, an uptick in manufacturing activity and a rise in factory orders – and instead focused on some of the deeper problems in the economy.
U.S. housing prices must stabilize before the markets can recover, because housing is the “quintessential leading indicator” that tipped the first domino, leading to mortgage problems, the credit crisis, the bear market in stocks and the recession.
“So, for the domino game to flip in the other direction, as is it did in the aftermath of the 1990-91 meltdown in the economy, stock market and consumer confidence – we desperately need to see housing prices stabilize to put in a definitive bottom,” he said in a note to clients. (Hat tip: Clusterstock).
But that isn't happening. Even with slightly encouraging housing data earlier this week, in terms of home sales, home prices are still falling, with prices down 29 per cent on average since the downturn began.
Clearly, sellers still outnumber buyers, and market is suffering with a massive amount of unsold houses, measured in terms of months' supply.
“The problem is that prices do not begin to stabilize until we break below eight months' supply – and they tend to deflate 3 per cent per quarter until that happens,” he said. “In fact, even if the builders were to declare a moratorium immediately – that is taking starts to ZERO – demand is so weak and the unsold inventory so intractable that it would now take over three years to achieve the holy grail of price stability in the residential real estate market.”
