While the Fed struck a dovish tone at its last meeting, market participants may be overly dovish, wh...
The Stock Market’s No Oracle
08/15/2011 11:26 am EST
But holding last week’s lows has taken on extra importance amid conflicting data on the economy, writes MoneyShow.com senior editor Igor Greenwald.
The late, great economics Nobel laureate Paul Samuelson famously observed (three months before I was born in 1966) that the stock market has predicted nine of the last five recessions.
Its record has not improved since. Stocks topped out in 2007, barely a month before the recession began, but not before the fall rally gave so many the false hope that the Federal Reserve would fix everything.
Fast forward to June 2009, when the first meaningful correction since the bull run began three months earlier had the S&P 500 down 9%, and most talking heads on TV screaming about the foreboding “head-and-shoulders” on the charts and the economic recovery petering out before it even began.
The stock market eventually discovered that the right shoulder it had so dreaded was actually more of a footstool, and that the recession was in fact ending at that very moment.
Last summer presented another opportunity to panic, as many did, at the thought that the European credit crisis would quickly throttle global growth. It didn’t.
And now we’ve had more of the same, except that this time Europe’s credit cancer has advanced to Italy and Spain, while low rates in the US are more a symptom of the economic fears—fiscal austerity chief among them—than a sign of confidence.
And once again, the stock market’s endured a bout of hysteria, this one of historic magnitude. As James Stack observed in his address to the San Francisco MoneyShow, the selling washout seen early last week, with more than 98% of all stocks dropping—many of them hard—was last seen during the 1987 market crash, and before than when Germany invaded France in 1940.
Does that mean a recession’s in the cards? Or does the rebound of the last three days make that risk more remote?
I’m taking my cues from the incoming economic stats rather then market gyrations, while acknowledging that the trading action of the last two weeks is the biggest red flag in three years.
And there have been signs that the economy has, in fact, withstood the latest turbulence, maintaining just enough forward speed not to crash and burn.
Payroll growth rebounded last month, from negligible back to merely insufficient to reduce unemployment, and recent jobless-claims data suggests employers’ economic jitters have not yet translated into pink slips.
Minimal consumer confidence and lackluster personal spending as reported by the Bureau of Economic Analysis have been superseded by Friday’s Commerce Dept. report of unexpectedly strong July retail sales.
On balance, the evidence suggests we’re stuck with the same economy we had a year ago or six months ago, one slowly and unevenly recuperating from the ongoing debt deleveraging. Meanwhile, a select few companies profit spectacularly from stronger growth overseas, as Asia and Latin America pursue prosperity and their rightful share of the planet’s resources.
And if this is the still the same domestic and global economy, and corporate profit margins are not about to shrink precipitously, then stocks are cheap at less than 12 times the current year’s likely earnings.
In his San Francisco presentation, Stack went over the most credible warning signs of a recession: a flattening yield curve, narrowing market leadership, and undue optimism among them.
The rebound of the last few days has provided another benchmark to watch. If stocks should crash through last week’s lows—not merely retest them, but head meaningfully lower by, say, 3% or more, that will be an important tell, I believe.
Until then, color me unconvinced and undecided. Given the stock market’s forecasting record, I think it pays not to jump to conclusions.
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