Are U.S. stock markets flashing another false signal regarding the U.S. economic recovery?Recent U.S. factory and housing data indicates signs of firming in each hard-hit sector, but my DailyFinance colleague Peter Cohan noted that a recent report on year-over-year U.S. rail traffic by The Association of American Railroads indicates otherwise: it suggests companies are cutting back inventories rather than building them -- definitely not a bullish sign for economic activity.
If the AAR report correlates with future demand conditions, the Dow has gotten well ahead of itself -- that is, institutional investors have pushed the Dow to levels not justified by earnings.
Conversely, the bulls argue the AAR report may reflect inventory conservatism, i.e. a cautious commercial sector that will keep inventories especially low, even in the face of probable demand increases, because they don't want to get caught again, as in 2008, with product the can't sell. These market bulls add that what counts is not 2008-to-2009 data comparison, but what economic fundamentals say now and in Q3/Q4 -- and it's that more favorable data that the market has priced-in.
Market Analysis: While not denying the importance of inventory and rail traffic data, I'm siding with the bullish camp that sees an economic recovery approaching in Q3/Q4.
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