I harp on about this over and over again: economic growth is when the average consumer is optimistic about their future; they are spending money, they know they will have a job tomorrow, and they are saving. In the U.S., we are seeing the opposite of all this.
In fact, consumer confidence in the U.S. continues to plummet; the Conference Board Consumer Confidence Index, an indicator of consumer spending, plunged more than 11% in October from September. (Source: Conference Board, October 29, 2013.)
But the misery doesn’t just end there for consumers in the U.S. economy. They are struggling to even buy the most basic of needs—food.
According to a recent study by the United States Department of Agriculture (USDA), in 2012, 17.6 million households in the U.S. economy were “food insecure”—they had difficulty bringing food to the table due to a shortage of resources. (Source: United States Department of Agriculture, September 2013.)
And as a result of so many Americans having trouble putting food on the table, it is costing taxpayers significantly. According to the U.S. Senate Budget Committee, over the last five years, the U.S. government has spent $3.7 trillion on 80 different poverty and welfare programs. The amount of money spent on these programs was five-times greater than combined spending on NASA, education, and all federal transportation projects over the time period. (Source: U.S. Senate Budget Committee, October 23, 2013.)
When I look at all these statistics showing how Americans are suffering, talk of economic growth or economic recovery just doesn’t sit well with me. I tend to focus on facts, rather than the noise. The noise says there is “economic growth” in the U.S. economy; while the numbers say the complete opposite.
But have no fear, dear reader. The stock market continues to tell us all is well. Today’s stock market is about the biggest bear trap I’ve ever seen.
If you are a stock market investor, you’ve probably come to the same realization I have: the stock market is behaving irrationally. These days, the fundamentals don’t really matter. What’s even more frustrating is that when you do talk about the fundamentals behind the market’s continued advance missing, you are ridiculed.
Soft revenues at public companies are just one area of concern. As of October 25, 244 companies on the S&P 500 have reported their third-quarter corporate earnings; only 52% of them registered revenues above the expectation, which means companies are selling less than they expected—not a good sign. Third-quarter corporate earnings growth is now expected to be just 2.3%. A month ago, the same number stood at an even three percent. (Source: FactSet, October 25, 2013.)
We are seeing some of the well-known bears of the stock market turning bullish. “Dr. Doom” is suggesting investing in stocks, and others like David Rosenberg, who has been bearish for years, are turning bullish.
Is this the peak optimism?
As it stands, investors believe the stock market is a safe place to be again. The charts of key stock indices only show an upward trajectory.
Chart courtesy of www.StockCharts.com
What will happen once the euphoria comes crashing down again? After all, irrationality cannot go on forever.
The most recent and best example of a stock market crash we have is from the financial crisis of 2008. We saw key stock indices come down like a rock. That stock market crash wiped out consumer confidence. Those who were retiring and saving each dollar for their golden days (by investing in stocks) saw their retirement dreams disappear.
But it wasn’t just consumers and retirees who got hit hard by the stock market crash of 2008; it also created problems with corporate America as business confidence also plummeted, thus the Great Recession.
I understand I am one of the last standing financial gurus who remain skeptical on the stock market. I am not saying we have reached a top, as it’s very hard to predict when irrationality is exuberant, but we are heading there. There are so many fundamental factors working against the 2013 stock market rise—and they are all being put aside in favor of market exuberance over a Federal Reserve that prints billions of new U.S. dollars each passing month. I feel the best investment strategy is to be cautious and to focus on capital preservation.