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Surprise! The WSJ reports that Economists are bad at forecasting:

Simply put, 2011 was a terrible year for economic prognostication. With seemingly no end of overseas disasters — natural and man-made — to throw off experts’ predictions, it’s hardly surprising that this year’s winning score would only have been good for 35th in last year’s rankings.

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Source:
Why Did Economists Get It So Wrong in 2011?
Ben Casselman
Real Time Economics February 13, 2012
http://blogs.wsj.com/economics/2012/02/13/why-did-economists-get-it-so-wrong-in-2011/

Rosier View Has Familiar Ring
BEN CASSELMAN and PHIL IZZO
WSJ, FEBRUARY 13, 2012
http://online.wsj.com/article/SB10001424052970203824904577215143354029590.html

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The folks at the St. Louis Fed – about whom I can’t say enough good things — produce a proprietary Financial Stress Index, a full explanation of which can be found here [PDF].

A full deconstruction of the Index is, frankly, a bit above my pay grade.  What’s not, though, is exploring the correlation of the Index to the S&P500 and discovering that while it’s generally well-correlated, that correlation has increased dramatically since the recession began at the end of 2007, as can easily be seen in the chart above.  (I’ve inverted the S&P500 to better display the correlation.)

The question I need to explore, of course, is whether — or how — this information might be useful in the context of equity exposure.

Note that the Index can dip below zero, and that it is still well off its lows.  Should “financial stress” continue to ease — the Index is updated weekly — it would suggest to me more S&P upside.  The biggest caveat, of course, is that all correlations work — until they don’t.

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BR: I would add that peaks in economic activity precede recessions — they start with economic stress rather low. So if we extrapolate from the (very limited data) above, we still have 12-24 months before the real heavy stuff starts coming down.

That said, 2 is not a statistically significant sample

“The economic recovery that has followed the end of the 2007-9 recession may be properly named the private enterprise bounce. While the overall recovery is comparable to recoveries after the two previous recessions, this one has been pushed higher by rising private investment and hiring, and held back by cuts in government spending and hiring.”

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click for larger chart

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Source:
A Recovery With Business Stepping Out in Front
FLOYD NORRIS
NYT, February 10, 2012
http://www.nytimes.com/2012/02/11/business/economy/a-recovery-with-business-out-front.html

However, it is a pretty long list of things that seem to be improving — or at least not getting worse:

• Housing starting to recover
• Labor market improving
• Credit expansion unfolding
• Low dollar
• Low rates
• Pent-up demand
• US mfg renaissance
• US energy sector booming
• Double-dip fears minimal so far this year
• Inflation receding around the world
• Europe financial strains have eased
• Liquidity is building in the world economy, eg, corporate cash
• There’ve been 83 stimulative policy initiatives announced around
the world over the past 5 months, eg, Indonesia cut rates
• The Fed has rates on hold at zero and is doing Operation Twist
• ECB is scheduled to further expand its balance sheet on Feb 29
by as much as + €1t
• There are no particular problems at the moment such as Japan
disasters, Thailand floods, supply-chain disruptions, gasoline
price spikes, and debt ceiling crises

What do you think? Is the data objectively getting better, or is this merely a selective list of positives?

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What say ye?

A move above 12,900 in the Dow Industrials would surpass the April 2011 highs, and the bulls would like to see that confirmed by the Trannies getting over 5630.

As we see from the indices via The Chart Store below, both the Industrials & Trannies are on the verge of that breakout. Just note that Classic Technical analysis requires you wait for the breakout/breakdown confirmation, rather than anticipate it.

Caveat: I am not a Dow Theorist, and this is a grossly oversimplified explanation. For more details, Wikipedia has an excellent primer on the major tenets of Dow Theory. Or check out Richard Russell’s The History of the Dow Theory.

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Click to enlarge:

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Source: The Chart Store

Source: WSJ, January 4, 2012

“United States economy has been growing at its slowest rate since the Great Depression. Most other major developed countries have also experienced unusually slow growth over the last 10 years.

The American economy’s reported 2.8 percent growth in the fourth quarter, at an annual rate, was seen as mildly encouraging. But it meant that over the previous 10 years, the economy had grown at a compound annual rate of just 1.7 percent. Until the current cycle, there had been no similar prolonged period of slow growth since the Depression.”

Charts below reflect the IMF forecasts of 1.8% real growth in 2012 and 2.2% in 2013. For the US, the past decade will have fallen to 1.5%. This is well below trend for any prior 10-year American period — but still above the 0.9 percent compound growth rate in the decade from 1929, the year the Depression began, to 1939.

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Source:
A Bleak Outlook for Long-Term Growth
FLOYD NORRIS
NYT, February 3, 2012   
http://www.nytimes.com/2012/02/04/business/a-long-term-slide-in-growth-for-industrialized-economies.html

Fortunately, Pew Trusts gave us a full overview:

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How Long Have the Unemployed Been Jobless?

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Where are the Long-Term Unemployed?
Total and Long-Term Unemployment by Census Division, Quarter 4, 2011

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More charts after the jump

Labor Force and Unemployed Populations by Age, Education and Race/Ethnicity, Quarter 4, 2011

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Long-Term Unemployment as a Percentage of the Total Unemployed

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Are Workers Being Laid Off Permanently?

Permanent and Temporary Layoffs as a Percentage of the Total Unemployed

Source: Pew Trusts

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Source: Barry Ritholtz: Yes, The Economy’s Lousy, But Stocks Still Look Good