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%!
Earlier this month, the U.S.
government revised its estimate of average monthly job growth from 153,000 each
of the past two years to 175,000 in 2011 and 181,000 in 2012. But
unemployment is stuck at 7.9% with the labor participation rate still
declining. Is that something to cheer about?
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:
Sequestration,
Like the Debt Ceiling, Is a Weapon of Mass Destruction
"Congress Holds the Purse Strings Like
so many train wrecks before, this one we can see coming. It doesn’t have to
happen in a sane world. But that is asking a lot of Washington D.C. and
specifically the U.S. Congress just now."
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:
A
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...........................................
The Curmudgeon
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.