Has the Stock Market Gone Mad?

Has the Stock Market Gone MadThe stock market…a place where rationality has been thrown out the door in favor of trading for immediate profits…profits based on what the government and Federal Reserve are planning to do next. It’s no longer a place for average investors to make money, as the fundamentals that drive key stock indices higher don’t really matter anymore. The notion has become “If it’s good news, buy! And if it’s bad news, then buy even more!”

We have been witnessing this phenomenon on key stock indices for a while now, and from my experience, such erratic behavior by the stock market usually comes at the end of a long up or down cycle.

Congress had decided to “kick the can” of U.S. debt down the road a little longer. When news broke last Thursday that they were planning to increase the U.S. debt limit for a few weeks and then come back to debate it, key stock indices had the best day of the year. Look at the circled area in the chart below:

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Hold on a minute!

Why did the S&P 500 jump so much on the Republicans saying they would put in a temporary new U.S. debt ceiling instead of debating it? Isn’t increasing the U.S. debt load bad? After all, we are the biggest debtor in the global economy.

Dear reader, this is the new norm on key stock indices. The bad news, meaning we will have higher U.S. debt, is taken as good news by key stock indices. And assets that should be increasing in value are actually being punished. Case in point: gold bullion prices.

On a very basic level, I question all of this because it doesn’t make much sense anymore. The euphoria has gotten to the point where all the stock market cares about is making sure the government keeps on with its reckless spending ways and that the Fed keeps printing money. In the long-term, we will pay dearly for this kind of thinking.

So, we’ve come to a point in the line where the stock market is only marginally dependent on the economic fundamentals (and the earnings growth of the companies that trade in it) and more focused on greater debt creation and continued paper money printing. This is not a good sign, and it cannot go on forever; hence, you can see why I remain so cynical and skeptical about key stock indices.

Michael’s Personal Notes:

No one wants to hear this…

The most basic factor of economic growth in this country, consumer spending, is flashing a warning sign about the U.S. economy.

According to Gallup, weekly U.S. economic confidence for the week of September 30 to October 6 plummeted the most since the Lehman Brothers’ fall in 2008. The index suggests consumer confidence is down significantly since mid-September, and it now stands at the lowest level since December of 2011. (Source: Gallup, October 8, 2013.)

Unfortunately, Gallup’s confidence index is not the only indicator suggesting consumer spending is plummeting. The Thomson Reuter/University of Michigan’s preliminary consumer sentiment index for October declined to 75.2 from 77.5 in September—the lowest figure since January of this year. (Source: Reuters, October 11, 2013.)

And companies that are dependent on consumer spending are seeing a downtick in sales. Take The Gap, Inc. (NYSE/GAP), for example. The company reported a decline of three percent in same store sales for the month of September. In the same period a year ago, the company’s same store sales were up three percent! (Source: The Gap, Inc., October 10, 2013.)

I’m not shocked at all when I see statistics that show consumer spending is getting weaker and weaker. In fact, I have been writing about this issue for a while. Consumer spending in the U.S. economy is in jeopardy—all the indicators are suggesting we have more chances of seeing it decline than seeing a robust move to the upside.

And that brings me to the essence of today’s message: Retailers in the U.S. economy are not going to have a robust holiday season. Even if we are able to see some increases in consumer spending, it will be because of deep discounts being pushed by retailers—the same scenario we saw played out during the back-to-school shopping season.

What’s next?

Our economy is based on consumer spending, accounting for about two-thirds of U.S. gross domestic product (GDP). Those who are hoping for a turnaround in the U.S. economy have to really think again.

What He Said:

“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector which is being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in Profit Confidential, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.