Fisher Investments Editorial Staff
Others

Time’s Test

By, 06/08/2009

Story Highlights:

  • Investors often cling to outdated or backward-looking indicators at the expense of more compelling, but less covered data.
  • In addition to other tentative signs of recovery, one little-known shipping index—the Baltic Dry—has staged a significant comeback in recent months.
  • There is, as ever, the chance stocks could retreat on new, powerful, and unexpected news. But the longer the rally stands, the stronger its legs.

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Superstitious sports stars refuse to wash a pair of socks they claim started a streak, or grow playoff beards to insure victory. Loony, right? Not so fast. Investors are steeped in superstition too. Like living and dying by lagging consumer confidence indicators or insisting, "So goes GM, so goes the country." (Maybe that was true 50 years ago, but today? Really?) Unfortunately, investing idiosyncrasies often displace more compelling, global indicators. Here's one not many people have heard of: The Baltic Dry Index, an obscure benchmark of raw materials shipping costs on the high seas.

 

The Baltic Dry has historically made an excellent coincident economic indicator (not ideal, but better than lagging)—it goes up when demand for big ships hauling raw materials rises. In our globally connected world, trade underpins economic health to a greater degree than ever before. Increased shipping demand means more raw materials crisscrossing the globe, a bullish sign for economic recovery. (Not least because China, the world's third largest economy, is an important driver of raw materials demand.)

 

Although it fell a bit Thursday, the Baltic Dry rose 23 straight days through Wednesday, its longest such streak since July 2006, to reach  its highest level since September 2008—just before the financial crisis hit full gear. And daily rates for the biggest ships rebounded from lows around $2,000 five months ago to $93,197 through Wednesday. Just like any index, relying solely on the Baltic Dry would be foolhardy—it has its quirks. But the broader trend stands. The foundations of trade appear to be recovering from a steep drop late last year and early this.

 

And other tentative signs of recovery remain firm. The stock rally (begun early March) keeps notching new gains, interbank lending rates are still low, yield spreads continue narrow—all indications uncertainty is waning. And while the banking sector has more regulatory hurdles to overcome—evident in the FDIC's meddling with management, the Obama administration's creation of a "pay czar," and the Fed's ever-evolving list of requirements to exit TARP—the financial system as a whole (key for economic recovery) continues to stabilize.

 

As if to underscore the inability of big, bad (old, predictable) news to knock stocks back, the market rose most dramatically this week in the face of GM's bankruptcy announcement. (Apparently, "Down goes GM, up goes the market.") There is, as ever, the chance stocks could retreat on something new, powerful, and unexpected. But nothing's more rigorous than the test of time—the longer the rally stands, the stronger its legs.

 

Have a great weekend.

*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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