Is it finally happening? Are investors coming to the realization that the stock market is fully valued as corporate earnings are declining and general economic conditions in the U.S. are deteriorating faster than at any time in the last five years? I believe the smart money figured this out long ago, but the masses will go down with the crash.
According to Aon Hewitt, a human resources consulting firm, investors increased their 401(k) stock allocation to 66.5% in February. (Source: Aon Hewitt web site, last accessed March 17, 2015.) Going back to 2007, when key stock indices were forming a top, investors had a similar percentage of their assets in 401(k)s. (Source: Employee Benefit Research Institute web site, last accessed March 17, 2015.)
While retail investors are loading up on stocks via their retirement savings plans, my belief is that we are putting in a huge top for stocks that will prove to be resistance for any further upward advance in equity prices for years to come.
Anemic Corporate Earnings Expectations
At the end of the day, stocks advance as corporate earnings expectations improve. But that’s not happening anymore. Corporate earnings are plummeting. (You can blame things like a stronger U.S. dollar and a weakening U.S. economy for that.)
In the first quarter of 2015, corporate earnings of S&P 500 companies are expected to decline by 4.9%. If this is actually the final number, then it will be the first time since the first quarter of 2012 that S&P 500 corporate earnings have declined, and it will be the biggest decline since 2009! (Source: FactSet, March 13, 2015.)
So far, 82 of the S&P 500 companies have issued negative guidance on their earnings per share. I expect this number to increase as we get closer to the end of the first quarter.
And as I have written before, revenue at many stock market darling companies is declining. In the first quarter of this year, revenue at the S&P 500 companies is expected to decline 2.8%—the biggest quarterly decline in revenue growth since the third quarter of 2009!
Looking at this, I don’t understand how one can even think about buying stocks.
U.S. Economy Facing Headwinds
There’s also the mounting pressure on the stock market and corporate earnings from the recent flurry of poor economic data. If you didn’t see my article last week on why we are actually headed into a recession in the U.S. economy, see it here now.
Just a couple days ago, we heard that for the month of February, housing starts in the U.S. witnessed their biggest month-over-month decline since 2011, down 17% in February 2015 from January 2015 and down 3.3% from a year ago. (Source: U.S. Census Bureau, March 17, 2015.) Hey, but I thought the housing market was doing better?
Yes, luxury homes are doing better because the rich got richer as the Fed made easy money ever easier, but the poor and middle class haven’t been able to get their hands on that easy money; they are not buying homes.
Only Crazy People Still Buying Stocks?
I have seen multiple stock market crashes in my 30-year career as a student of the stock market. I can tell one thing for certain: whenever economic conditions deteriorate and corporate earnings decline, you want to stay away from the stock market.
Almost three months into 2015, key stock indices like the Dow Jones Industrial Average are flat for the year. And the stock market gyrations are getting more frequent with stocks up sharply one day, and down sharply the next day—often an indication of a market top because it shows fear.