Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

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Stock Market Pricing-in a Recession?

U.S. Economy Close to Technical RecessionBy no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.

I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.

Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.

I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple … Read More

Why We Are Closer to a Recession in 2014 Than You Think

U.S. Economy to Fall into a Recession This QuarterDon’t buy into the notion that there’s economic growth in America!

We’ve already seen U.S. gross domestic product (GDP) “unexpectedly” decline in the first quarter of 2014, and now there are signs of another contraction in the current quarter. (The technical definition of a recession is two negative quarters of GDP—we’re halfway there!)

As you know, consumer spending is the biggest part of our U.S. economy, accounting for about two-thirds of our GDP. And consumers are pulling back.

Consumer spending in the U.S. economy declined 0.26% in April from March. This was the first monthly decline since December of 2013. (Source: Federal Reserve Bank of St. Louis web site, last accessed June 4, 2014.)

And while consumer spending is one indicator that suggests a recession may soon be coming into play in the U.S. economy, there’s also one very interesting phenomenon occurring that suggests the very same.

The Federal Reserve is serious about pulling back on its quantitative easing program. And in anticipation of the Fed pulling back on money printing (when it first indicated it would start tapering), the yields on bonds shot up.

But since 2014 began, and the Federal Reserve actually started to taper, the yield on … Read More

U.S. Economy to Enter Recession in Next 12 Months or Less

Consumer Spending Telling Us About U.S. EconomyAn economy is said to be technically in a recession when it experiences two consecutive quarters of negative gross domestic product (GDP) growth.

The biggest portion of the U.S. GDP calculation is consumer spending; then comes investments, government spending, and, finally, net of exports. By far, consumer spending is the biggest factor in calculating GDP. All you need is a slight decline in consumer spending for GDP to fall.

And as it stands, consumer spending in the U.S. economy is on the decline. In 2013, it accounted for nearly 70% of GDP, meaning that for every $1.00 increase in GDP, $0.70 was associated with consumer spending.

Since November, consumer spending for durable goods (goods that can last for a long time, like a T.V. or furniture) declined by 3.23%. (Source: Federal Reserve Bank of St. Louis web site, last accessed April 22, 2014.)

When we look at sales at retailers in the U.S. economy, they keep telling the same story: U.S. consumers are tapped out. Of 175 retailers tracked by FactSet, more than half of them have reported store sales in the fourth quarter of 2013 that were below market expectations. (Source: FactSet, April 11, 2014.)

So far, for the … Read More

Is the U.S. Economy Headed Towards Recession?

US Economy Headed Towards RecessionA country experiences an economic slowdown when its industrial production lags, its jobs market shows a dismal performance, corporate profits deteriorate, and the general standard of living declines.

Sad to say, this is exactly what the U.S. economy is experiencing right now.

Industrial production in the U.S. economy is anemic. For the month of July, industrial production in the U.S. economy remained unchanged; in June, it saw a menial increase of 0.2%; in May, it was flat; and in April, industrial production declined 0.4%. (Source: Federal Reserve, August 15, 2013.)

Last month, the production of consumer goods in the U.S. economy declined by 0.5%.

Moving onto the jobs market in the U.S. economy, while politicians certainly do a good job at making it sound like the employment picture is improving, the majority of jobs created since the Great Recession have been in low-wage-paying sectors.

Corporate profits, as has been very well documented in these pages, are dismal. Companies in the U.S. economy have found ways to boost their earnings through artificial means, like stock buyback programs, and are cutting costs by reducing their labor force. Sure, these maneuvers make earnings temporarily look better; but when you look at their sales, … Read More

More Evidence of a Cyclical Recession Ahead

More Evidence of a Cyclical Recession AheadThe pharmaceutical industry isn’t particularly a favorite of individuals, but many of the large players within it make for excellent retirement holdings. With high yields and good visibility, a large pharmaceutical company is a welcome addition in equity market portfolios.

Pfizer Inc. (PFE) represents the typical performance we’re seeing from many corporations. The company beat on earnings, missed on revenues, and reaffirmed full-year guidance.

Second-quarter sales dropped seven percent to $12.97 billion, of which three percent was due to foreign exchange.

The company had a major gain in earnings, but income from continuing operations was $0.50 per share, up 28% from $0.40 a share.

On the face of it, the company’s lack in top-line growth was a disappointment. But in the stock market, things are always relative, and the stock still went up on what can only be described as weak earnings news. Pfizer is currently yielding 3.3%, with a price-to-earnings ratio of approximately 14.

Another company that announced disappointing results was E. I. du Pont de Nemours and Company (DD), or DuPont, whose share price was particularly strong in July.

DuPont’s second-quarter sales dropped one percent to $9.8 billion. Once again, the company’s agriculture division was the strongest with … Read More

Probability of Cyclical Recession Increases

Probability of Cyclical Recession IncreasesThis is a big week for capital markets, with the Federal Reserve meeting and July’s unemployment numbers to be released on Friday.

One thing that’s been clear with the stock market is that it has been staying lofty, mostly due to the expectation that the Fed will continue quantitative easing. But under this continued monetary stimulus, financial results are showing mediocrity.

And while capital markets are mostly influenced by Fed policy, the mediocrity in revenue and earnings cannot be ignored. Earnings are holding up because of cost containment and share buybacks. This is not a recipe for lasting financial health.

I look at capital markets constructively and through the lens of the investor. It’s all about the action and how institutional investors react to economic news.

While there’s been a significant stock market breakout this year, I’m thinking that the possibility of a cyclical recession is becoming more probable. Historically, the U.S. economy is due for one; expectations for economic growth are falling, and expectations regarding earnings are quietly being reduced by Wall Street for this year and next.

It just might be that the end of quantitative easing will coincide with a technical recession.

With this scenario, stock market … Read More

Why a Recession for the U.S. Economy Within the Next 12 Months Is Inevitable

120713_PC_lombardiOne fact has become quite clear: if we want to see robust growth in our gross domestic product (GDP), then there needs to be a significant change in consumer spending.

But current consumer spending in the U.S. economy is looking bleak, and it makes me skeptical about the GDP growth ahead. We’ve already seen GDP in the first quarter revised lower due to consumer spending; and it won’t be a surprise to me if something similar happens in the second quarter.

Don’t just take my word for it. Look at what the CEO of Family Dollar Stores, Inc (NYSE/FDO), Howard R. Levine, said about consumer spending while presenting his company’s corporate earnings for its fiscal third quarter (ended June 1, 2013):

“Our consumables sales remained strong and we continued to gain market share. However, our discretionary sales remained challenged as our customers have been forced to make spending choices between basic needs and wants. Consistent with market trends, we expect that our customers will continue to face financial headwinds…” (Source: “Press Release; Family Dollar reports Third Quarter Results,” Family Dollar Stores, Inc. web site, July 10, 2013.)

Remember: retailers like Family Dollar Stores see the patterns of consumer spending first-hand—their … Read More

Dismal U.S. Consumer Spending to Drag Us Back into Recession?

Dismal U.S. Consumer Spending to Drag Us Back into Recession While the mainstream economists were quick to believe that the U.S. economy is growing as the key stock indices suggest, I stood by my opinion that it isn’t.

After the first estimates of gross domestic product (GDP) for the U.S. economy came out, a wave of optimism struck and stock markets rallied. It seemed as if everything was headed in the right direction.

Sadly, they were wrong.

In its third and final revision of GDP, the Bureau of Economic Analysis (BEA) reported that the U.S. economy grew at just 1.8% in the first quarter of 2013 from the fourth quarter of 2012—that is 25% lower than its previous (second) estimates, when the BEA said the U.S. economy grew 2.4%, and 28% lower from its first estimate of 2.5%. (Source: Bureau of Economic Analysis, June 26, 2013.)

The primary reasons behind the decline in GDP growth are that domestic consumer spending and exports from the U.S. declined.

Going forward, I see continued dismal consumer spending in the U.S. economy. There’s no rocket science behind my reasoning, just one simple economic concept. Economics 101: when interest rates increase, consumer spending declines, because it costs the consumer more to borrow, so they step … Read More

Why the Coming Global Recession Will Hit the U.S. Harder Than Last Time

While the mainstream focuses on the smallest nation in the eurozone, Cyprus, I am concerned about the overall health of the global economy. The reality is that progress in the global economy is slowing down with major economic hubs struggling.

Dear reader, Cyprus will eventually get a bailout. We have already seen countries like Spain, Portugal, and Greece each receive a significant amount of loans to keep their countries afloat. Why would Cyprus be any different?

But aside from Spain, Portugal, Greece, and Cyprus, when I look at the remainder of the global economy, I see a recession emerging. Demand is simply declining in the global economy—which I believe will lead to a recession.

Look at China: the Chinese economy is expected to grow at 8.1% in 2013 and eight percent in 2014. In 2012, the country grew at the slowest pace in 13 years. (Source: The Sydney Morning Herald, March 20, 2013.) But I believe the growth forecasts for China are overly optimistic.

The Chinese Customs Administration reported that the country imported only 56.4 million tons of iron ore—the main ingredient for steel production—in February 2013, compared to 65.5 million tons in January. This represents a decline of … Read More

Chances of Global Recession in 2013 Very High Now

In the last three months of 2012, the United Kingdom (U.K.) experienced a contraction in its gross domestic product (GDP). Another contraction in the current quarter will put the U.K. into another recession. (Source: Reuters, March 12, 2013.) So far this quarter, the economic numbers don’t look good for the U.K., as manufacturing fell 1.5% in January.

Of course, many eurozone members are deep in recession. Jens Weidmann, President of Germany’s central bank, the Bundesbank, said this week, “The crisis is not over despite the recent calm on the financial markets.” (Source: Kuehnen, E. and Carrel, P., “Euro woes not over, German central bank says, as piles up crisis fund,” Reuters, March 12, 2013.) First it was the debt-infested nations that caused economic chaos; now stronger nations, like France, are struggling to keep up as they face high unemployment rates.

The situation elsewhere in the global economy is deteriorating quickly, and it’s not just the U.S., U.K., eurozone, Japanese, and Chinese economies that are suffering. According to JPMorgan Global Manufacturing and Services Purchasing Managers’ Index (PMI), the global economy’s output dropped to its lowest level in four months in February 2013, reaching 53.0, compared to 53.2 in January. (Source: Markit, … Read More

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