Those who follow the stock market closely know that on days when we hear the chairwoman of the Federal Reserve speak and she mentions something about “easing” or how the central bank will continue to use its “extraordinary measures” for a long period of time, the stock market jumps.
I’ve talked about this phenomenon many times in these pages. Another example of this happened on March 31, when the Fed chairwoman spoke in Chicago. Please see the chart below. It’s a minute stock chart of the S&P 500. I’ve circled a rough area around the time when Janet Yellen spoke.
As she spoke more of that “easing” talk, the stock market jumped, as usual.
So it has come to the point where the stock market rises when it hears the Fed will keep interest rates artificially low for a prolonged period of time and when a poor jobs report comes out (like last Friday morning’s), saying jobs have been created in spite of the fact that there is a heavy concentration of jobs growth in low-paying sectors and millions of people have given up looking for work.
In other words, we have reached the point where the stock market takes any news as a reason to move higher; this is characteristic of a market top.
When we look at the fundamentals of the stock market, we see companies in the S&P 500 are using financial engineering to boost per-share earnings. These companies have bought back their shares and have been cutting costs to boost profits as revenue growth just isn’t there anymore.
The proof? In the fourth quarter of 2013, 28.8%, or 144, of the S&P 500 companies reported an outright decline or no change in their revenue from the previous year. (Source: S&P Dow Jones Indices, last accessed April 2, 2014.)
And so far, for the first quarter of 2014, 93 of the S&P 500 companies have issued negative corporate earnings guidance for their first quarters of 2014. (Source: FactSet, March 31, 2014.) This is a fact that shouldn’t be taken lightly: one-quarter of the S&P 500 companies have warned on corporate earnings for the quarter.
A stock market spinning any news into good news so it can rally while the stocks that trade on the stock market are posting earnings growth at the slowest pace since 2009 is a risky stock market.