Companies are Worried About
U.S. Economy, but not Wall Street or Economists!
by The Curmudgeon
We've had the Great Recession and now we have the Great Disconnect - between the U.S. stock market and economy. The bull market which began in March 2009 has gained 126% with many averages at multi year highs and the NYSE A/D line at an all-time high. But the U.S. economy has hardly kept pace with annual GDP growth of <2%, high unemployment (and very low labor participation rate), and low productivity which actually fell 2% last quarter.
The Curmudgeon felt struck by lightning when reading the conflicting lead stories in the WSJ and USA TODAY. The Journal's lead piece was titled, Companies Fret Over Uncertain Outlook, while USA's larger headline read, "Economists Gain Optimism." Perhaps, more revealing was that the financial section of each newspaper was outright BULLISH on the stock market! The Journal leads with: "Is Bull Sprint Becoming a Marathon." USA Today followed with: "No Nosebleeds for this Bull Market."
The basic thrust of these and likeminded articles are that the U.S. stock market is disconnected from the real economy because there are oceans of liquidity and no alternative investments. We've mentioned in previous articles that the combination of Federal Reserve money printing, zero short term interest rates, negative real rates on Treasury notes, and relatively tame inflation have caused money to pour into U.S. stocks. But how long can this disconnect go on?
Are declining earnings estimates bullish for stocks? Apparently yes! The first Journal article states:
"Companies warn that the current quarter will be more challenging, and analysts project first-quarter earnings at S&P companies will rise just 1.7%, Thomson Reuters says, or less than half what they were predicting at the beginning of the year. Sixty-three S&P companies have lowered their forecasts for first-quarter earnings, according to FactSet Research, while 17 have raised them, the largest disparity since the firm began tracking the data in 2006."
"Many executives see shrinking economies in Europe. Closer to home, they worry about hesitant U.S. customers, chilled by continued Washington gridlock. In a sign of executive caution, a Wall Street Journal survey of 50 S&P companies found they plan to increase investment this year by 2%, signaling a dearth of big growth opportunities. Through the first nine months of 2012, S&P companies boosted investment 8%, following a 20% increase in 2011."
But then how does one reconcile the second Journal piece that makes an argument that the secular bear market in equities ended in March 2009 and since then we've been in a new, multi- year or multi-decade bull market?
Meanwhile, USA TODAY polled economists who were uniformly bullish on the economy:
"The nation's economy and job-creating engine will start to purr later this year as business activity picks up -- more than offsetting federal government cutbacks”, predict economists surveyed by USA TODAY.
“After starting the year slowly, the economy will shift into a higher gear this summer and then grow for the next nine months at the fastest pace in three years, according to the median estimates of 46 economists."
"I think we're really on the verge of this becoming a self-sustaining recovery," says Richard Moody, chief economist at Regions Bank.
But looking at the forecasts closely, they're not so hot. The economists expect average monthly job gains of 171,000, with the pace quickening late this year. They expect unemployment to fall from 7.9% to 7.5% by year's end. Are those figures something to get excited about? The monthly job gains are less than the previous two years with unemployment ticking down by only 0.4%!
Curmudgeon comment: More astonishing is that none of the above USA Economist forecasts seem to have factored in sequestration- the automatic federal government spending cuts that will kick in March 1st unless congress & Prez reach agreement on budget cuts. Yet Congress is not even meeting to discuss this looming train wreck.
Here's an article on this topic that caught our eye:
In closing, we thought we'd quote from an article by John P. Hussman, Ph.D. an ex-Stanford University Finance Professor who now manages the Hussman mutual funds:
Reluctant Bear's Guide to the Universe
"Present market conditions now match 6 other instances in history: August 1929 (followed by the 85% market decline of the Great Depression), November 1972 (followed by a market plunge in excess of 50%), August 1987 (followed by a market crash in excess of 30%), March 2000 (followed by a market plunge in excess of 50%), May 2007 (followed by a market plunge in excess of 50%), and January 2011 (followed by a market decline limited to just under 20% as a result of central bank intervention). These conditions represent a syndrome of overvalued, overbought, overbullish, rising yield conditions that has emerged near the most significant market peaks – and preceded the most severe market declines – in history.
Until next time...........................................
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.