The Economic Bifurcation May Be Converging

We still have bifurcated economic conditions; leading to this tug-of-war among financial markets. This morning, several divergent indicators were released. The Conference Board’s May Leading Economic Index increased 0.8%. Eight of the ten factors that contribute to the index were positive, primarily led by the the steep interest rate spread. The second release this morning was the Reuters / University of Michigan Mid-June Sentiment survey. This index declined to 71.8 from 74.3 in May; the 71.8 reading was significantly below expectations of 73.8.

On Tuesday, Gallup released the following poll:

Economic Confidence Index, Gallup

The high for the S&P in the first half of 2010 was about 1220 toward the end of April. Comparatively, in the first hallf of this year, the S&P hasn’t printed below 1249, yet Gallup’s Economic Confidence index is near its low for the year—and lower than it was at any point in H1 2010. The consumer is weak; corporations are relatively healthy. However, they are not mutually exclusive events. At some point, that gap will have to be closed. It will not be over the course of one summer, but over the next quarter or so, you should expect individual economic situation to factor in to equity market returns.

It is time to determine your strategy going forward. With dual objectives, such as return consistency and equity outperformance, portfolios will always be subject to mediocrity. You need to focus on one at a time.

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