Is Investor Misery Signaling Higher Stock Prices?

Published Fri, Jul 22nd, 2011   Louis Basenese, Chief Investment Strategist

If you’re new to the Wall Street Daily Nation, here’s the rundown…

I embrace the adage that “a picture is worth a thousand words.” So each Friday, I hand-select compelling graphics that put the week’s investment news into perfect perspective.

All it takes is a quick glance and you’ll be up to speed – this time, I’m painting a picture of prevailing investor sentiment and the latest real estate data.

Whoever said achieving enlightenment isn’t easy? Enjoy!

Why So Glum?

Americans clearly don’t think the economic glass is half full.

Case in point: The U.S. Misery Index’s latest reading, which is the sum of the unemployment rate, inflation rate and consumer confidence, just hit a 28-year high.

Interestingly, the last time the Misery Index hit close to these levels was back in May 1983, after the 1981 – 1982 recession. As you know, stocks went on to enjoy one of the strongest and most enduring bull markets in history.

I’m not saying we’re in store for the exact same thing. But as I’ve discussed here before, consumer confidence is a contrarian indicator. When it’s low, stocks tend to rally.

Since consumer confidence is a major component of the Misery Index, is it really surprising that the market keeps charging higher? Not to me.

Souring on Washington

After 18 months of debt talks, Washington still can’t come to an agreement. Even with the clock ticking on an August 2 debt default deadline.

The latest survey from Citi reveals that investors’ patience is wearing thin.

Forget the still floundering real estate market, inflation or the weakening U.S. dollar. In the minds of investors, politicians are far and above the biggest risk to the economy in the next year.

Don’t Be Misled About a Real Estate Rebound

I’ll be the first to concede that we all want the real estate market to finally rebound. But don’t let your hopes cloud your perception of reality.

While it’s true that the latest housing starts data was particularly strong – 629,000 starts versus expectations of 575,000 – we’re far from a rebound.

You see, until we work off the excess inventory, there’s no way prices are going to stabilize and start rising again. And sadly, as this chart reveals, existing home inventory is trending in the wrong direction. Even if we adjust for seasonality.

That’s all for this week. Before you sign off, though, do me a favor…

Let me know what you think about this weekly column – or any of our recent work at Wall Street Daily – by sending us an email to feedback@wallstreetdaily.com or by leaving a comment on our website.

Thanks and enjoy the weekend!

Ahead of the tape,

Louis Basenese