Fisher Investments Editorial Staff
US Economy, Market Cycles

Here Comes . . . a Little Sun

By, 02/10/2010

Story Highlights:

  • While headlines pinned Tuesday's rally on a Greek bailout, falling wholesale inventories are much more meaningful.
  • Firms got lean during the recession, and not having to work through inventory backlogs means they can ramp up production to meet rising demand.
  • With capacity utilization low, firms can produce more without significantly raising costs, likely keeping margins healthy for some time—and boosting earnings as sales improve.


After the East Coast snowpocalypse, West Coast rainstorms, and four sad weeks for stocks, a little sunshine broke through Tuesday as US stocks rose 1.3%. Doesn't mean it will continue, of course—stocks are notoriously fickle in the near term. Still, it appears cheer over a potential Greek bailout spread to stocks Tuesday. Happy news…but it's just one day, and not indicative of a longer term trend. Individually, days can be up big or down big on any kind of news. Doesn't mean Greece is, with 100% certainty, out of the woods entirely, or that debt-fueled volatility is at an end. Just that we're all feeling sunnier about it…today.

Given some time, we anticipate Greek jitters will die down. Meanwhile, there are plenty of positive fundamentals crowded out from the headlines. Take wholesale inventories, which surprised with a 0.8% drop in December 2009—a sign demand rose. We noted several times last year that companies severely slashed inventories early in the recession to keep costs contained. It appears the strategy worked.

Tuesday's report is especially satisfying after some critics knocked the last GDP report, saying the 5.7% jump was driven by a slower pace of inventory depletion compared to the first three quarters of 2009, and pointing to November's 1.5% increase (revised Tuesday to 1.6%) as evidence of slower growth ahead. But November's increase is nothing to fret—restocking depleted shelves isn't bad; it means we need more products to meet demand. To wit, wholesalers' sales rose 0.8% in December. Inventories didn't evaporate—they went from warehouses to stores. If firms didn't believe goods could move, they wouldn't stock shelves. 

Falling inventories also show firms continue to be lean and mean. Without full warehouses to fall back on, they must increase production to keep up with demand—which should be positive for the economy. And also for earnings—because lean and mean firms don't need to see massive sales increases to get a big earnings boost. And big earnings increases should provide a very nice tailwind for stocks.

So while seemingly little things like falling inventories may not make major headlines today, taken together with other little-noticed positives, these are the factors that truly drive longer term returns in a bull market. So remember to appreciate the little things…and this rising bull market. 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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