The headlines keep flashing: S&P 500 keeps hitting a new record—almost daily! Optimism is increasing to levels not seen since 2007. And I continue to ask why.
As I have been harping on about in these pages, the disparity between the U.S. economy and the key stock indices is increasing as the days go by. Key stock indices are moving beyond what is reality.
That reality is that economic conditions in the U.S. are taking a wrong turn—they are screaming, “Danger ahead!” But sadly, key stock indices like the S&P 500 are ignoring the signals.
Unemployment, one of the major issues faced by the U.S. economy, showed further deterioration in March. The amount of jobs added was pathetic. It’s an indication that businesses in the U.S. economy aren’t hiring as some think.
In the same vein, consumers in the U.S. economy are turning pessimistic. The Consumer Confidence Index reported by the Conference Board fell more than 12% from February to March. (Source: Conference Board, March 26, 2013.) Keep in mind that if consumers aren’t feeling good about their money, then they don’t go out and buy. As a result, companies in the key stock indices see their profitability come under pressure.
And places where the media tell us “things are improving” are actually still in the doldrums. Consider the U.S. housing market. Home prices are still depressed—even with some gains witnessed in 2012—because of institutions buying single-family homes. At the end of 2012, 27.5% of all homes with a mortgage in the U.S. economy had negative equity—that’s 13.8 million American homeowners! (Source: Zillow, February 20, 2013.)
The reason behind the rise in the key stock indices mainly has to do with easy monetary policy and money printing. It’s almost as if investors are being forced to take higher risks because returns are limited elsewhere. Take a look at the following chart showing margin debt (the amount of money borrowed to invest in stocks) in the New York Stock Exchange (NYSE):
Chart copyright © Lombardi Publishing Corporation, 2013
Margin debt reached $366.14 billion in February of this year. This amount was the highest since June 2007, when margin debt was $378.24 billion. (Source: New York Stock Exchange web site, last accessed April 10, 2013.) In July 2007, close to the time the key stock indices made their all-time highs, margin debt in the NYSE reached its highest level ever—$381.37 billion.
Be very careful with stocks, dear reader. Key stock indices may rise a little further, but their downside risks are piling up fairly quickly.
What He Said:
“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending, coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi in Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.