Have stock markets been about earnings or economic growth?
Yesterday the US posted negative statistical economic growth
This from Bloomberg,
The economy in the U.S. unexpectedly came to a standstill in the fourth quarter as the biggest plunge in defense spending in 40 years swamped gains for consumers and businesses.Gross domestic product dropped at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and a smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.
Well a decline in government spending while statistically negative should be good news for the real economy. That’s because money not spent by government can be saved or productively used by the private sector.
But given the insatiable spending habits of the US government this is likely to be temporary.
Yesterday’s technical decline shows how anemic US statistical growth has been (chart from tradingeconomics)
This is the annualized economic growth rate for the US. (tradingeconomics.com)
Now for US companies beating earnings estimates...
The above chart from Bespoke Invest
Consensus expectations of strong earnings has been on a declining trend since 2006, this seems detached from the recent blitz in the US stock market.
Yet I previously explained how central bank actions can artificially boost earnings and how credit booms can mask statistical growth
The US is experiencing a resurgent real estate sector despite the sluggish economy, courtesy of the Ben Benanke’s QE infinity. (charts from Northern Trust). Money creation has to flow somewhere, and they seem channeled to the asset markets.
Rising property prices, which should spillover to rental prices, will likely increase statistical inflation. This puts to risks the current boom which could prompt the FED, whom in rabid fear of deflation, will likely resort to more inflationism in order to continue to suppress interest rates. And monetary expansion could feed through to the housing and housing bubble and or even consumer price inflation. The US asset economy has become greatly dependent on the Fed's doping policies. This means the US Federal Reserve has been trapped.
Yet, aside from the property sector and the spreading asset boom (via hedge funds, junk bonds, CDOs, etc…), stock market benchmarked by the S&P 500 has been attempting to carve new record highs (bigcharts.com)
Markets (and even the real economy) have essentially been distorted by monetary policies such that they don’t operate on conventional wisdom. Even the economic profession have been at a loss with their dysfunctional models.