According to the Bespoke Investment Group, every year, Wall Street analysts declare that the stock market will rise, and since 2000, the annual average forecast has been for a 9.5% gain. The reality is that the market has only risen at a 3.9% rate over this time frame. The 2008 forecast was for a market increase of 11%; the reality was -38%. To say that Wall Street promotes the stock market is an understatement.
Back to the present. Most of the talking heads on bubblevision assert how strong the U.S. economy is. They don’t use any hard data as proof except for the market level itself and sometimes the sentiment surveys. There is very little hard data that looks bullish. President Trump’s promises of lower taxes and less regulation would help economic growth, but, as I have explained in the past, even if all of the promises are kept (unlikely), the positive impact on the economy is several quarters, if not years, away.
Let’s look at the latest set of anemic hard data:
• Q1 Real GDP growth is likely to be 1% or even lower. The Atlanta Fed GDP Now forecast for Q1 is 0.6%, down from 1.2% a couple of weeks ago;
• The payroll data for March (Establishment Survey) was pathetic, at best, showing total new employment of 98,000 (the consensus forecast was for 175,000 new jobs). To make matters worse, 38,000 jobs were subtracted from prior months;
• Manufacturing jobs did grow by 11,000, but, according to Wall Street economist David Rosenberg, the shrinkage in the manufacturing workweek is the equivalent of 61,000 lost jobs. The breadwinner demographic cohort (25-54 years old) lost 47,000 jobs (negative now for three months in a row), and half of the employment gains for the past two months have come from people getting a second job – usually a sign of stress in the consumer. The median duration of unemployment rose to 10.3 weeks from 10.0 weeks in February, another sign of stress;
• The consumer has pulled back on big ticket purchases as shown by the 5.4% plunge in auto sales in March (now three months of decline in a row). Auto loan delinquencies are now rising, yet another sign of stress;
• Retail jobs shrank by 30,000!
• One would think that at full employment, which is what 4.5% unemployment represents, wages would be rising faster than March’s 0.2% and 2.7% year over year. With no growth in hours worked, there is little hope for robust wage growth;
• Bank lending growth is decelerating in all major categories, from commercial to auto to consumer. Despite the optimism, corporations are not borrowing, and without the expansion of working capital or investment in plant and equipment, economic growth won’t accelerate.
Most of the hard data is going the wrong way.
What is really telling is the fact that interest rates aren’t rising despite the Fed’s best jawboning efforts. Interest rates are supposed to rise if the economy is approaching full employment and things are getting better. If “reflation” were truly returning, by now, the 10 Year Treasury yield would be well north of 3%. Since the election, however, it has never climbed higher than 2.64%, and is currently hanging around the 2.23% level. On Wall Street, it is common knowledge that the bond market is always the best predictor of the state of the economy.
From the Fed’s latest minutes and from Chairwoman Yellen’s remarks at her University of Michigan appearance on April 10, it is clear that the Fed intends to raise interest rates back to “normal” and to remove liquidity from the market by reducing its asset holdings beginning late this year. What “normal” means is a concern, as “normal” for interest rates may be something significantly different today than it was pre-’09 due to demographics, debt levels, and the economy’s potential non-inflationary growth rate. The fact is, ten of the last thirteen Fed rate hiking cycles have resulted in recession. If the Fed continues to raise and inflation remains nowhere in sight, recession becomes a real risk. While such developments may still be some time off and are still speculative, equity markets often anticipate or over-anticipate (which is why Wall Street is said to have predicted ten of the last four recessions); the current state of the market is a good example. Today, however, the bond market seems to have a better handle on the economy and inflation than does the equity market; but when the equity market catches on, well, that’s when corrections occur.
Conclusions
The fundamentals continue to tell us something different from the sentiment. Here is the risk of investing with the hope theme (i.e., the hope that the market stays buoyant): even if the hard data catches up to the sentiment, the market would really have no reason to go up. If the hard data doesn’t catch-up, or only partially does, then the investor risks the inevitable market correction. Perhaps, the flat line of the S&P 500 since the end of February is the beginning of the market’s realization that the “hard data” facts differ significantly from the hope “sentiment.” Furthermore, as the week closed, geopolitical issues were escalating, adding to investor uncertainty.