Finally, Chart 3 suggest a white knight may potentially be riding into this stock market correction. Most believe the stock market needs a “policy catalyst” to stop the bleeding. That is, many expect the Fed, the ECB, or perhaps Chinese policy officials will announce a policy shift in support of the financial markets. However, it may simply be economic reports which turn out better than most fear which ultimately help the stock market to find a bottom. The Atlanta Fed calculates an ongoing measure of U.S. quarterly real GDP growth illustrated in Chart 3. This measure was declining steadily since early November but has spiked upward again since mid-January. Currently, stocks are being battered by intensifying recession fears. However, could first quarter economic reports reassure that a recession is not forthcoming and provide the catalyst which ends the recent stock market route?

Chart 3
Atlanta Fed GDPNow GDP Forecast*
*This concept provides an estimate of overall economic activity. It is an estimate of current quarterly GDP growth updated daily as information is released during the quarter.

?Who knows how much longer this correction will last and if it will yet turn into a bear market. However, for those who believe the U.S. is not headed for an imminent recession, this trio of “correction bottoming charts” (i.e., revalued stocks, renewed pessimism, and a potential positive catalyst) is encouraging. We would be redeploying cash on weakness and repositioning portfolios toward international stocks, toward industrial/producer/capital goods sectors and away from defensive (utilities and telecom) and consumer sectors (i.e., consumer discretionary, consumer staples, and health care). Finally, we would recommend adding some of those financial stocks currently being priced for a repeat (not likely in our view) of the 2008 financial crisis.

Eoin Treacy's view

Here is a link to the full report.

The US economy is further along in its recovery that just about anywhere else which helps to explain the relative performance of the Dollar and the stock market. With stress in a number of other major economies Wall Street has been less volatile. This may be cold comfort for absolute return investors but it represents a safe haven for international investors reluctant to hold cash. The Fed’s reluctance to unilaterally raise rates further may also be a factor in stock market steadying.

A reversionary rally is underway with the major indices bouncing from the region of their 2014 lows. The big question is what will happen when they get back up to test the region of their respective trend means. The issues described in the above piece on fixed income represent medium-term headwinds for risk assets and they will need to be seen to improve if a stock market recovery case, beyond short-term steadying, is to be credible.