We continue to believe that the market is probably in a
topping process after its long run since March 2009. The economy is still stuck in sub-par growth
trend while the market’s action is indicative of substantial technical
Recent economic reports reflect a catch-up after the
unusual cold and snowy winter rather than a breakout to the long-awaited
“escape velocity” that never seems to arrive.
We have pointed out in recent comments that when the highly volatile
monthly data is smoothed by looking at year-over-year results, it seems
apparent that the economy is still in the same zone of lackluster growth that
it has been in for the last few years.
That is why the Fed finds it so necessary to continue to
reassure the “Street” that it will maintain an extremely accommodative monetary
policy for as far as the eye can see. Make
no mistake about it. The market clearly
moves up anytime the Fed emphasizes its easy policy and declines whenever
investors think otherwise. Just a few
weeks ago the market took a temporary dive when Chairwoman Yellen casually
indicated that the Fed could start to raise rates about six months after the
end of QE. A large number of economists
and strategists maintain that the economy is set to pick up substantially, but
the market’s action indicates that investors and traders don’t really believe
The main problem with the economy starts with consumers,
who account for close to 70% of the GDP and are the main drivers of economic
growth. Consumers have limited sources
of spending including wages, transfer payments, savings, and credit. There is currently a problem with each of
them. It is well known that real wages
have exhibited minimal growth during the entire economic recovery. Transfer
payments were reduced as part of the “fiscal cliff” negotiations in 2012. The household savings rate is now at a
recovery low and, according to the Corporation For Enterprise Development, 44%
of Americans have less than $5,887 of savings for a family of four. As for credit, households are still carrying
heavy debt burdens and 56% have subprime credit scores.
This leaves only the job market as a potential source of
future spending, and that area also faces strong headwinds. Despite then wildly-heralded April payroll
increase, the year-over-year growth was only 1.74%, well within the inadequate
range prevailing over the last two years.
In fact, the highest annual increase in the current economic recovery
was only 1.88%, an amount that pales in comparison to past cycles. Over the last 60 years comprising 720 months,
a full 196 months (27%) showed annual increases of 3% or more. In the present cycle, not a single month even
showed a rise of 2%, let alone 3%.
As for the stock markets own action, it is clear that
fewer and fewer stocks are participating in the rallies and the collapse of the
leading momentum stocks indicates an increasing reluctance to take risks. New daily highs on the NYSE were running at
about 600 in November and under 200 now.
The extreme bifurcation of the markets is also indicative of an
unhealthy market. One day last week the
Russell 2000 closed under its 200-day average at the same time that the S&P
500 closed only 0.4% below its all-time high.
Among the leading momentum stocks Tableau Software is down 46%, 3-D
Systems 52%, FireEye 49%, Pandora 45%, Splunk 57%, Yelp 48%, and LinkedIn
43%. Most of these stocks are running
deficits, and the few that don’t are still selling at extremely high P/Es, even
after their precipitous declines.
All in all, we believe that after the post-winter
catch-up, it is unlikely that the economy will achieve “escape velocity” and
that the risk of a major market decline remains high.