In the first nine months of this year, the S&P 500 has run up 18%—that’s about two percent per month. Other key stock indices have provided similar returns. At this pace, by the end of 2013, the S&P 500 will be up 24% for the year.
As my doubts about the performance of key stock indices continue to mount, some in the mainstream are saying the market will only go higher.
A story that ran in Bloomberg on Monday said the movement we see in the S&P 500 now is an almost exact duplicate of what we saw in 1954—a year in which the S&P 500 rose 45%. The research found that the S&P 500 is moving pretty much the same on a day-to-day basis as it did in 1954. The correlation coefficient (a statistical measure that looks at the movement in two variables) is 0.95. The maximum you can have is 1. (Source: Bloomberg, September 30, 2013.)
In 1954, the S&P 500 reached the highest level since the Great Depression. (Yes, in 1954, 25 years later, the stock market finally broke above where it was in 1929!) Please look at the chart below to get a more precise picture.
Chart courtesy of www.StockCharts.com
After 1954, the S&P 500 continued to rise, and since then it has never tested those levels again. There were a few glitches, and that stock market went nowhere between 1965 and 1979 (14 years), but overall, the trend until 2000 was upward.
Now, with the S&P 500 doing the same (breaking above its previous tech boom highs), will the key stock indices continue to rise? Is it a buying opportunity?
Readers of Profit Confidential know I am very skeptical of the rally we are experiencing in key stock indices. Comparing the 2013 rally to the rally of 1954 is just outright wrong. The fundamentals behind the two stock market rallies (1954 and 2013) are very different.
In the year following 1954, U.S. gross domestic product (GDP) increased more than seven percent. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 2, 2013.) The U.S. unemployment rate in 1954 stood at 5.6%. In 1955, it declined to 4.4%, and in 1956, it fell to 4.1%. (Source: Ibid.)
Now, let’s fast-forward to today.
In the second quarter of 2013, U.S. GDP came in at an anemic annual pace of 2.5%. The Federal Reserve expects U.S. GDP to slow in 2014. In 2015, the Fed expects GDP to run 3.0%-3.5%. For 2016, it expects a GDP of 2.5%-3.3%. (Source: “Economic Projections,” Federal Reserve, September 18, 2013.)
And let’s not forget that our GDP growth projections keep falling! For example, in June of this year, the Federal Reserve forecasted U.S. GDP would average between 2.3% and 2.6% this year. In September, it revised that projection down to 2.0%-2.3%.
The average unemployment rate in the first eight months of this year has been 7.6%. Where is it headed next? The Federal Reserve doesn’t expect the unemployment rate to hit between 5.4% and 5.9% until 2016! (Source: Ibid.) You also have to keep in mind the quality of jobs being created in the U.S. economy now are part-time, low-wage-paying work.
Anywhere you look, there’s misery in the U.S. economy. We have millions of homeowners living in houses with negative equity, the number of Americans using food stamps has skyrocketed, and the majority of Americans closing in on retirement have next to no savings!
2013 is no 1954! The U.S. economy was booming 60 years ago!
Dear reader, the key stock indices are rising on nothing but the Federal Reserve printing tons of paper money. We saw what happened when the Fed started talking about tapering its $85.0 billion a month in printing: stocks tanked, bonds tanked. Stocks are holding on by a thread; but the only certainty is that the Fed can’t go on printing forever.
Companies in key stock indices have found ways to show “better-than-expected corporate earnings.” They revise them lower, and then they beat their revised (lowered) expected earnings.
And another new phenomenon is public companies buying back their own stock to push up per-share earnings!
At the end of the day, companies in the U.S. economy are really not selling more. They are just cutting costs. Recently, we heard Merck & Co., Inc. (NYSE/MRK), one of the biggest drug manufacturers traded on the S&P 500, will reduce its labor force by 8,500. These lay-offs and other cost-cutting measures will save the company about $2.5 billion in operating expenses by 2015. (Source: Merck Investor Relations, October 1, 2013.)
The rally in stocks that began in 2009 is running out of fuel—and I’m very surprised it has lasted this long. The disparity between the economic fundamentals and the performance of key stock indices continues to increase, and the longer that goes on, the steeper the sell-off will eventually be.