Trading Range Economy & Markets

We continue to believe that the economy and the markets are now entering a frustrating trading range condition. Frustrating anyway for investors looking for sustainable momentum - contrarian trading around the edges should be profitable. From an economic standpoint the following comment by UBS is typical for this environment: "somewhat mixed data, with greater than expected strength in real GDP growth (3.5%) but weaker than expected labor costs in Q4 (ECI up 0.8%) . . . excluding motor vehicles production, real GDP was up at a 4.8% annual rate in Q4 after 1.2% in Q3. However, we doubt the faster pace in the fourth quarter is likely to be sustained . . . other data continue to suggest that more slowing is underway than is evident in the Q4 GDP report."

The same trading range will likely be in place in the bond and equity markets. In a post several days ago we mentioned our belief that interest rates had then risen sufficiently to create a favorable environment for lengthening bond duration. Today, the iShares Lehman Treasury 20+ Year ETF rose nearly one percent. Stocks will also likely trend sideways to slightly higher from here within a broad trading range.