The S&P 500 is up 8.5% YTD and matching the level last seen September 15th, 2008, the date that Lehman Brother filed for bankruptcy. With US stocks up an incredible 79.5% from the March 9th, 2009 low, a pause or even a pullback is to be expected. Our forecast for the S&P 500 for all of 2010 is only 8%, so reason enough to be cautious 4 ½ months into the year.
The critical question is whether current stock market valuations are justified given gradual improvement in the US economic situation, or in fact are we setting ourselves up for a sucker punch as the economy slips back into recession?
A "double dip recession" is defined as a second period of economic contraction followed by a brief expansion." This can occur because the expansion is not substantial enough to bring enough unemployed workers back into the economy despite, for example, inventory rebuilding, and can also be caused by an exogenous event (the brief downturn in the US economy in 2000 was extended to 2002 by the aftershocks of the 9/11 attacks.
It's not unreasonable to fear a "double dip recession" in the current circumstances. Unemployment remains high at 9.7% even as job growth exceeded 100,000/month for only the first time since Fall 2007. Measures of consumer confidence remain deeply depressed. US housing has leveled off near the levels of 2003. We are telling our clients to expect NO appreciation in real estate for about the next ten years. Credit to consumers and small business remain constrained, with consumer debt levels falling for the first time ever. Still the ratio of consumer debt payments to disposable income is only slightly below the record established Q1 2008. Consumers can't spend when a high portion of their income goes to service mortgages, credit cards, and car payments.