Red Hot Stock Market on Thin Ice

Red Hot StockU.S. stocks have rallied since mid-February after the worst start ever. With an economic slight-of-hand, you could even say the stock market is at its highest levels in 2016, but that isn’t saying much.

U.S. stocks may be positive for the first time this year, but the foundations on which the bullish S&P 500 are founded are a mirage. U.S. fourth-quarter gross domestic product (GDP) was bad, revenue and earnings are worse, growth prospects in China remain weak, and the Federal Reserve remains dovish about the U.S. economy. The stock market may be red hot, but there’s no real reason for the euphoria.

U.S. Stocks at Highest Levels in 2016!

U.S stocks are at their highest levels in 2016! But that’s not really something investors should be patting their backs over. It’s all relative.

This year began with the worst two-week period ever for the U.S. stock market. And then it got worse. Between December 31, 2015 and February 11, 2016, when the markets bottomed, the S&P 500 fell 10.5%, the Dow Jones Industrial Average lost 10.1% of its value, the NASDAQ fell almost 15.0%, and the Russell 2000 Small Cap Index tanked an eye-watering 17.0%.

U.S. stocks fell in the first six weeks of 2016 on the heels of weakening growth prospects in China, sub-one-percent fourth-quarter U.S. GDP, and crashing commodity prices. Investors were fleeing the stock market in droves.

Red Hot Stock Market Belies Weak Stocks

For the most part, though, the U.S. market has experienced a reversal of fortune. Again, it’s relative. The S&P 500 is up approximately 13.0% since February 11, but it’s up less than one percent in 2016. The Dow Jones has rebounded more than 11.0% over the same timeframe but is up slightly more than one percent since the beginning of January.

Unfortunately, that growth is not based on anything sustainable. Growth prospects in China remain weak. Central banks in the European Union and Japan didn’t exactly introduce fresh rounds of monetary stimulus because their economies are doing well. And the Federal Reserve didn’t raise interest rates out of the kindness of its heart.

The fact is U.S. stocks are being propelled higher by near-record corporate share repurchase programs and the Federal Reserve’s overly generous easy monetary policies. It can’t be because of fourth-quarter financial results and the outlook for the first quarter.

Of the 118 companies that have issued earnings per share (EPS) guidance for the first quarter, 92 (78%) have issued negative EPS guidance and 26 (22%) have issued positive EPS guidance. The estimated year-over-year earnings decline for the first quarter of 2016 is -8.4%, which is below the expected earnings growth rate of 0.3% at the start of the quarter. (Source: “Key Metrics,” FactSet, March 18, 2016.)

If this is the final earnings decline for the quarter, it will be the first time the index has seen four consecutive quarters of year-over-year declines in earnings since the fourth quarter of 2008 through the third quarter of 2009. It will also mark the largest year-over-year decline in earnings since the -15.7% drop in the third quarter of 2009.

The estimated revenue decline for the first quarter of 2016 is -0.6%. If this is the final sales decline for the quarter, it will mark the first time the S&P 500 has seen five consecutive quarters of year-over-year declines in sales since before 2008.

And for some reason, shares are rebounding.

Analysts first thought U.S. stocks would experience earnings and revenue growth in the first quarter of 2016. They then pushed it to the second quarter of 2016. Now, they have pushed out their optimistic projections for earnings and revenue growth to the third quarter of 2016.

Don’t hold your breath.

Playing the Hand the Market Deals

When it comes to the stock market, you have to play the hand the markets deal. The global economy remains fragile and the stock market is volatile. The stock market may be red hot right now, but the winds of change could shift at any point.

You may not be a gold or silver bug, but these conditions are excellent for precious metals. And you don’t need to be long with gold or silver either. You just have to understand what the markets are doing and take advantage of any opportunity.

In a world of low or negative interest rates and growing volatility, gold and silver are presenting investors with opportunities of growth. Since the beginning of the year, gold prices have surged more than 17.0%, while silver is up 14.0%.

With the state of the global economy, it looks like low interest rates and the rush to negative interest rates are going to be here for a long, long time. This is good news for those who like physical gold and silver—and those who make room for gold and silver mining companies in their portfolios.