Sentiment watch. Eurozone exports plunge. Chain store sales weak. Debt re-shuffling does not reduce indebtedness.
I am beginning this morning with the “Sentiment Watch” feature because, absent rising earnings (yes, they peaked 6 months ago), only rising multiples can propel equities higher for now. The only goal here is to display how the media can influence investor behavior and try to help us all stay cool and rational.
Investors take cue from record close for the Dow
Some money managers said they are starting to embrace the stock market’s gravity-defying rally. Still, excitement was tempered by acute awareness of the Federal Reserve’s force in driving stocks higher.
“Among clients and investors, there is this newfound courage,” said Erik Davidson, deputy chief investment officer of Wells Fargo & Co.’s Wells Fargo Private Bank, which manages about $170 billion in assets. The overall economy “is a lot less worse than people had feared.” (…)
For now, though, corporate earnings and dividends are rising , the U.S. housing market has stabilized, the unemployment rate is gradually declining and bond yields are low. Those are all positives for stocks, many experts said, and good reasons to stick with the market. (…)
One buy signal: Transportation stocks are rising in tandem with the blue-chip index, an occurrence that many investors view as a harbinger of more gains. On Tuesday, the Dow Jones Transportation Index hit its own record high, which “absolutely” confirms to Mr. Saut and other believers in so-called Dow Theory that stocks still have room to climb, he said. (…)
“The market has momentum,” Mr. Koesterich said. “I think we go higher until you have an event that suggests things aren’t as rosy as people think.”
Gallup’s Economic Confidence Index fell to -22 last week from -13 the week prior, with most of the decline occurring after Congress and the president ultimately failed to avert the $85 billion in budget cuts mandated as part of the sequestration legislation. The weekly average of -22 is the lowest such average since the -22 reading for the week ending Dec. 30, amid the fiscal cliff debate.
The federal economic policies confidence gauge fell 11% to 35.5, also a 15-month low. The six-month outlook index cratered 18% to 38.8, the worst since October 2011. The personal financial outlook reading lost 4.4% to 52.2, though that’s still above the neutral 50 level separating optimism and pessimism. (…)
“Americans across the board think that the economic outlook is grim,” said Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence, IBD’s polling partner. “The big slide in our economic outlook subindex perhaps signals a turning point and an impending entry into a recession. This month, nearly 60% believe that the economy is in a recession.”
But don’t worry:
THE CHEERLEADERS ARE BACK
Now that the Fed has begun talking about eventually stopping stuffing the economy with monetary heroin, market cheerleaders are jumping over each other explaining that, after all, the Fed did not have that much impact on equity markets since 2009. Therefore, investors should not shiver at the thought of an eventual starvation:
Many analysts argue the Fed’s easy money policies have been the main catalysts for the run-up. Charts following the financial crisis show stocks have rallied every time the Fed has announced a new round of quantitative easing. The market has fallen when the central bank has been less accommodative.
But some investors and analysts think there is more to the story.
Dan Greenhaus, chief global strategist at New York brokerage firm BTIG, chimed in last week when he noted earnings growth in the S&P 500 and the index’s returns are roughly equal since March 2009. “We suppose this isn’t all about the Federal Reserve after all,” Mr. Greenhaus told clients.
Others have jumped on board. “The Fed’s easy money approach has not been the driver for equity prices as is presumed,” said Tobias Levkovich, chief equity strategist at Citigroup. (…) “Earnings have been far more crucial to the S&P 500’s trend,” Mr. Levkovich said.
Jim Paulsen, chief investment strategist at Wells Capital Management (and a well-known bull), also made the argument that fundamentals, rather than liquidity, have been the main drivers behind the rally.
“Stock prices are not nearing all-time record highs simply because of continuous liquidity injections from the Fed,” Mr. Paulsen said on Monday. “Rather than a sugar high orchestrated by the Fed, this bull market appears much more like a ‘fundamental high’ driven by a revival in private economic activities.”
He pointed to data showing stocks throughout the past four years have roughly tracked the trends in corporate profits, weekly jobless claims and economic momentum – measured by the Citigroup U.S. Economic Surprise Index. (WSJ)
It is indeed nice to see that people are finally realizing that earnings matter in the (P/E x earnings = price) equation. Just when earnings have peaked…
Back to the real world
Eurostat, the European Union’s statistics agency, said exports from the euro zone fell 0.9% in the fourth quarter compared with the third quarter, a sharp reversal from 1% growth in the period before. (…)
Eurostat said imports also fell 0.9% in the fourth quarter, the steepest drop since the end of 2011, having grown less rapidly than exports in the previous three months. Weak imports reflect the poor state of consumer demand in the currency bloc. Business investment, consumer spending and government expenditure all continued to fall in the fourth quarter, Eurostat figures showed. (…)
Eurostat now estimates the currency bloc has been in recession for 15 straight months.
ScotiaCapital has this chart showing that Europe is nowhere near a major turn, China is attempting to soft land while the U.S. remains the only growth engine out there, albeit a weakish one.
WEEKLY CHAIN STORE SALES
Weekly sales were up 0.2% last week but the 4-week m.a. remain s stuck at a low level, up only 2.1% Y/Y.
INDEBTEDNESS REMAINS VERY PROBLEMATIC
(…) Those who believe that we have made good progress in terms of addressing the high financial leverage in our society must be kidding themselves. (…) it is fair to say that we haven’t really achieved much so far beyond some re-shuffling of debt from the household and financial sectors to the public sector.
Overall debt levels remain excruciatingly high and I note with some trepidation that Greece is not even close to being the most indebted nation in the world today. In chart 1 debt from all the four main sectors of the economy have been added together. As experience has taught us, it is total debt that matters. Focusing on government debt alone will lead to bad investment decisions. Niels C. Jensen, Absolute Return Partners LLP
Without a healthy level of economic growth there is no way that all this debt can ever be repaid, hence the growing focus on nominal GDP growth, so, in that respect, economic growth still matters.