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

Economic Slowdown

An economic slowdown is a contraction in the economy. This can be viewed by several indicators, including lower gross domestic product (GDP), higher unemployment, lower industrial production, lower business investment, decline in retail sales, and a decrease in corporate profits. Not all of these factors need to be present for an economic slowdown, but these are some of the main indications to watch for regarding the overall health of the economy.

Another Warning Sign: Stocks Hit Highs on Collapsing Volume

By for Profit Confidential

The Only Bear Left StandingSo the S&P 500 has touched the 2,000 mark.

Will the S&P 500 continue to march to new highs?

Well, my opinion towards the stock market hasn’t changed. I remain skeptical for a variety of reasons, many of which I have shared with my readers over the past few months.

But I have a new concern about the stock market, something that hasn’t been touched on by analysts: trading volume is collapsing.

Please look at the table below. It shows the performance of the S&P 500 and its change in trading volume.

Year Performance Change in Volume
2012 11.73% - 17.58%
2013 14.50% - 24.91%
2014 8.40% - 44%*

*Until August 25, 2014

Data source: StockCharts.com, last accessed August 25, 2014

Key stock indices like the S&P 500 (it is the same story for the Dow Jones) are rising as volumes are declining, suggesting buyers’ participation in the stock market advance is very low. For a healthy stock market rally, any technical analyst will tell you that you need rising volume, not declining volume.

It’s Economics 101: rising demand pushes prices higher. In the case of the S&P 500, we have declining demand (low trading volume) and rising prices. Something doesn’t make sense here.

Looking at the economic data, it further suggests key stock indices are stretched. We continue to see the factors that are supposed to drive the U.S. economy to deteriorate.

Just look at the housing market. The number of new homes sold continues to decline. In January, the annual rate of new-home sales in the U.S. was 457,000 units. By July, it was down more than 10% … Read More

Stock Market Fake? Economic Growth Falls to Slowest Pace Since 2009

By for Profit Confidential

Eurozone Economic Growth PrecariousNot too long ago, I reported that Italy, the third-biggest economy in the eurozone, had fallen back into recession.

Now Germany’s economy is pulling back. In the second quarter of 2014, the largest economy in the eurozone witnessed a decline in its gross domestic product (GDP)—the first decline in Germany’s GDP since the first quarter of 2013. (Source: Destatis, August 14, 2014.)

And more difficult times could lie ahead…

In August, the ZEW Indicator of Economic Sentiment, a survey that asks analysts and investors where the German economy will go, posted a massive decline. The index collapsed 18.5 points to sit at 8.6 points. This indicator has been declining for eight consecutive months and now sits at its lowest level since December of 2012. (Source: ZEW, August 12, 2014.)

Not only does the ZEW indicator provide an idea about the business cycle in Germany, it also gives us an idea of where the eurozone will go, since Germany is the biggest economic hub in the region.

But there’s more…

France, the second-biggest economy in the eurozone, is also in a precarious position—and a recession may not be too far away for France.

After seeing its GDP grow by only 0.4% in 2013, France’s GDP came in at zero for the first two quarters of 2014. (Source: France’s National Institute of Statistics and Economic Studies, August 14, 2014.)

France’s problems don’t end there. This major eurozone country is experiencing rampant unemployment, which has remained elevated for a very long time.

While I understand North Americans may not be interested in knowing much about the economic slowdown in the eurozone, we … Read More

If the Economy Is Improving, Why Are Investors Pricing in a Slowdown?

By for Profit Confidential

U.S. Economy Slowing Down Here in 2014The Bureau of Economic Analysis (BEA) surprised even the most optimistic of economists when it reported the U.S. economy grew at an annual rate of four percent in the second quarter of 2014.

On the surface, the number—four percent growth—sounds great. But how serious should we take that gross domestic product (GDP) figure?

Firstly, I’d like to start by pointing out that the BEA often revises its GDP numbers downward. We saw this happen in the first quarter. First, we saw the BEA say the U.S. economy grew by 0.1% in the first quarter, then after a couple of revisions, they said the economy actually contracted 2.9% in the quarter.

I obviously expect the BEA to lower its initial second-quarter GDP numbers again.

But here’s what really worries me…

If the GDP data suggests the U.S. economy is growing, why are investors pricing in an economic slowdown?

The chart below is of the 10-year U.S. Treasury, the so-called safe haven. Back in 2007 to 2009, investors ran to U.S. Treasuries as a safe haven. As the U.S. economy improved, the yields on the 10-year U.S. Treasury started to rise as interest rates rose with general optimism towards the economy.

10 Year Treasury Note Yield Chart

Chart courtesy of www.StockCharts.com

But since the beginning of this year, yields on the 10-year U.S. notes have declined 18%. This is despite the fact the biggest buyer of these bonds, the Federal Reserve, has stepped away from buying these Treasuries as its quantitative easing program comes to an end.

At the same time, we have the stock market finally starting to give in. So if the stock market is a … Read More

The Problem With Reality in 2014

By for Profit Confidential

U.S. Economy Halfway to a Recession AlreadyEarlier this month, Jeremy Siegal, a well-known “bull” on CNBC, took to the airwaves to predict the Dow Jones Industrial Average would go beyond 18,000 by the end of this year. Acknowledging overpriced valuations on the key stock indices are being ignored, he argued historical valuations should be taken with a grain of salt and nothing more. (Source: CNBC, July 2, 2014.)

Sadly, it’s not only Jeremy Siegal who has this point of view. Many other stock advisors who were previously bearish have thrown in the towel and turned bullish towards key stock indices—regardless of what the historical stock market valuation tools are saying.

We are getting to the point where today’s mentality about key stock indices—the sheer bullish belief stocks will only move higher—has surpassed the optimism that was prevalent in the stock market in 2007, before stocks crashed.

At the very core, when you pull away the stock buyback programs and the Fed’s tapering of the money supply and interest rates, there is one main factor that drives key stock indices higher or lower: corporate earnings. So, for key stock indices to continue to make new highs, corporate profits need to rise.

But there are two blatant threats to companies in the key stock indices and the profits they generate.

First, the U.S. economy is very, very weak. While we saw negative gross domestic product (GDP) growth in the first quarter of this year, the International Monetary Fund (IMF) just downgraded its U.S. economic projection. The IMF now expects the U.S. economy to grow by just 1.7% in 2014. (Source: International Monetary Fund, July 24, 2014.) One more … Read More

Stock Market Pricing-in a Recession?

By for Profit Confidential

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 reason that they don’t have money to spend.

The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.

But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.

I, for one, … Read More

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