In the first quarter of 2013, key stock indices like the Dow Jones Industrial Average and the S&P 500 rose an unprecedented 10%.
Below, I’ve charted a comparison of the performances of the Dow Jones Industrial Average and the S&P 500:
Chart courtesy of www.StockCharts.com
In economics, the stock market is often referred to as a leading indicator. If the market is rising, as it has been, it is an indicator that the economy will improve in the months ahead. But, as this stock market has been rising, economic data have not been improving.
As I have been harping on about in these pages, the key stock indices are rising on nothing but optimism and an ever-increasing money supply—both of which can only last for so long. Economic uncertainty is still present and future expectations are dismal.
For the first quarter of 2013, 86 S&P 500 companies have issued negative corporate earnings guidance—that’s 78% of all the S&P 500 companies that have issued earnings guidance so far. (Source: FactSet, March 28, 2013.)
The Manufacturing Purchasing Managers’ Index (PMI), monitored by the Institute for Supply Management (ISM), decreased 2.9% from February to March. The index stood at 51.3 in March, compared to 54.3 in the previous month. (Source: Institute for Supply Management, April 1, 2013.)
As for unemployment, it is still very high. On Friday, the Bureau of Labor Statistics (BLS) will be reporting the jobs numbers. It won’t surprise me to see the unemployment rate unchanged (maybe even rise), because companies on key stock indices are looking to cut their costs—and the only option left for them is to decrease their workforce.
On top of this, risks in the eurozone still persist. These debt-infested countries are suffering. Greece is in an outright depression. Italy and Spain are witnessing their economic conditions quickly eroding. The two strongest nations in the region, Germany and France, are starting to see their economies slow. A significant number of U.S. companies on key stock indices derive their revenues from the eurozone.
The key stock indices may rise a bit as irrationality can go on for a while. In 2007, the economic conditions in the U.S. economy were anemic, but the S&P 500 and the Dow Jones Industrial Average were driven to all-time highs. Later we witnessed one of the steepest market sell-offs ever registered for key stock indices. The same thing could happen again this year with the markets.
What He Said:
“The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much or our country home has doubled in price.’ Looking around today it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in Profit Confidential, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.