Which is right: Stocks or economy?
The difference of opinion between Wall Street and Main Street is growing as equities soar but growth stalls.
The stock market and the economy have always maintained a tenuous link. Equities are prone to periods of extreme fear and greed, pulling valuations around what the economic fundamentals suggest is "fair value." It gets really bad near major turning points, such as the exuberance and the "subprime is contained" falsehoods of 2007 to the terror and "the bailouts won't work" panic of 2009.
I think we're seeing another turnaround point right now as the major averages go vertical and gauges of investor sentiment reach levels not seen since the 2000 dot-com bubble; even as the economy, by some measures, shows signs of falling back into recession.
So, which is right about where we're headed?
The driver of the disparity is central bank intervention, with the Federal Reserve, the European Central Bank, and Bank of England, and the Bank of Japan all flooding the financial system with cheap cash. Much of the impetus for the market rally of the past two months has been indications the Bank of Japan is about to throw conservatism to the wind and indulge in even more aggressive monetary stimulus.
While hedge fund types love this, and a liquidity starved economy loved it in 2008 and 2009, there is just simply too much money floating around to make a difference now. The Fed's balance sheet has swelled past $3 trillion, up from $800 billion before the financial crisis, $1.4 trillion of which is simply sitting at the Fed's vaults as commercial banks have nothing to do with the money but hold it as deposits.
Moreover, as the deterioration of the economic data suggests, all this cheap money isn't preventing the natural business cycle from working its will, resulting in new recessions in Europe and Japan, with another one headed for the United Kingdom.
Things aren't looking good here at home.
The bulls Thursday ignored a terrible Kansas City Fed activity survey, which featured an employment index that sliced into recessionary territory. When joined with similarly weak results from the other regional Fed Surveys, thaw overall picture is clear: With more tax hikes and spending cuts on the way, possibly spiked with a government shutdown, the economy is already in trouble.
If all this is making your head hurt, just know it all boils down to this:
- Sentiment is excessively bullish at levels seen near major market turning points.
- Fiscal policy will be a growing drag on growth, but here and overseas, this year.
- Technical indicators remain weak with breadth, volume, and options market activity suggesting caution is warranted.
- Economic fundamentals are still deteriorating and have fallen into recessionary territory.
- With gas prices rising again, the energy market remains vulnerable to the rise of Islamic terrorists in North Africa and simmering tensions in the Middle East.
- Most of Europe, including Germany, is either in or is falling into a recession. Japan is in recession. And the United Kingdom is falling into recession as well.
Add it all up, spiked with the big price swings, market dislocations, and other drama, and this feels like a major, historical moment for Wall Street and the economy at large. A moment when the belief that central bank intervention can paper over deeper, structural issues by giving hedge funds and investment banks more money to play with about to be shaken.
We're seeing the evidence of that play out in real time.
Since the Fed launched QE3 and QE4 late last year, the economy has lost serious momentum.
And now, with the inflation hawks worrying about the destabilizing effects of all that cheap money, the clock is ticking on the "don't worry, the Fed will save us" meme that has driven this bull market. When it ends, amid political rancor over gun control and the budget in the months to come, it won't be pretty.
Just like the shattering of the illusion that profit margins at Apple (AAPL) were impenetrable -- amid increasing competition, a saturated smartphone market, and a tapped out American consumer -- has been ugly.
In response, I'm adding new short positions against industrial materials via Cliff's Natural Resources (CLF), AKSteel (AKS), and the ProShares UltraShort Basic Materials (SMN) to my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended CLF short, AKS short, and SMN long to his clients.
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We are trying to hang in there, still a long two hours to go....Manipulators seeing an opportunity and also waiting on the Fed...Be cautious these last couple of hours...More after the close.
The stock market is only loosely tied to the economy. I look at the economy (and earnings) as sort of a weak, but persistent, magnet to stocks. Sometimes that magnet is the dominant force, other times there other other factors overriding the fundamental data. What we've been seeing lately I suspect is more "greed" and manipulation than anything else. It can't go on for much longer. A fair S&P should be around 1375-1400.
I disagree with Anthony in than I believe the economy will actually improve by the end of the year (for a large number of reasons), but we're just not there yet, and we still have one more (delayed) fiscal hoop to jump through. That's why I'm staying conservative for now unless I see a substantial pull back in the markets.
"$1.4 trillion of which is simply sitting at the Fed's vaults as commercial banks have nothing to do with the money but hold it as deposits. "
BS. Money doesn’t just sit at any bank. They can’t make money that way. The banks are finding creative ways of using derivatives and other structured off-market products to expand the money supply and lend it to others within the financial industry, like hedge funds and hot money investors who speculate in the stock and bond markets. That’s why the markets are up. Too much money being printed by the Fed going to boost the markets and the bank’s profits at the expense of savers and the main street economy.
Now the Central Planners at the Fed are complaining and starting to blame investors for not acting prudently and putting the new money where the Fed claims they intended it to go. What a surprise. This grand multi-trillion dollar experiment had been a disaster and there is no way to ever unwind it, which was also presumably part of their original plan.
God is always right!
Socialism is always right!
Long live Christian Socialism!
This doesn't seem that large a format, and I have to wonder about the size of the authors subscriber base;
BUT, ISN'T THERE SOMETHING WRONG WITH THEM GETTING THE BUY/SELL info and then the author tries to sway the MSN Masses (to help his picks work)?
Jim Jubak at least waits until after he posts to trade on his ideas; he lets you know up-front.
I won't go as far as calling this author unconscionable, but one should be aware this is purely self-aggrandizing...
Institutional investors and some companies are investing in stocks and their businesses right now because there's no new President. This was bound to happen.
But the average person, Main Street, isnt biting. There's no guarentee in anything with the economy, no feel good indicators. Average folk will continue to be thrifty, save money, and work their buts off as usual.
We are still struggling out here in real world. The stock prices rising higher has nothing to do with us, just the big wigs.
I bring home a paycheck every week. I can count on that, but when a few movers quickly take money out of the market, fear will set in "All will be lost. But I'll still get my paycheck
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