Stock Market- Economic Outlook
''Among the hazards of speculation is the happening of the unexpected - I might even say of the unexpectable-
ranks high. There are certain chances that the most prudent man is justified in taking-
chances that he must take if he wished to be more than a mercantile mollusk."
--Reminiscences of a Stock Operator--
Sunday August 3rd ,2003
Stock Market and Economic Outlook
Friday's equity action was soft as the Dow , SP500 and Nasdaq closed under Thursday's lows .
Here we are August 2003 already and let me see if I can get this right.....
Rising unemployment.. Rising interest rates. and Forecasts now being raised for next years’ GDP equal a constantly rising stock market..
I suspect that is hardly the case..
History has shown that contrary to Wall Street’s rants and raves economic growth does not necessarily mean a perpetually rising stock mkt...
For example, does anybody wonder why the Raving Bulls never speak about 1968 to 1982..? ( the U.S. economy grew at an aggregate over 250 %.. more that the aggregate 175 % percent from 1982 to 1999. )
Why not talk about it ? Because the Stock market essentially moved sideways with little change…
Presently economic forecasts for above trend growth keep getting pushed out into the future …then reality sets in… it’s the same old story over and over again..
Currently long term rates have shot up and that is supposed to be good and a sign of a pick up in business activity, which may well be true. However in my opinion the deficit shock ,the Folly of Fed and perhaps some rather hefty loss taking by some rather large portfolios is partly to blame.
The reality is very little job growth , economic growth is meek at best and being aided in a large part by defense spending. The danger here is that it’s not going to get dramatically better anytime soon.. toss in a rise in long-term rates and the mix equals a disaster for the stock mkt as it has to re-adjust for the potential of a moderation in consumer spending once the refinance boom falls apart and the tax rebates checks come and go…
Many forecasters , economists and popular TV personalities who are highly regarded make comparisons of today’s Stock market to lift off of 1982 and the post desert storm period to justify a new bull mkt in stocks.
However in my opinion there are some very striking differences :
The 1982 bull market beginning was preceded by a long period from the mid to late 1960’s where the stock market moved sideways.. It spent time in three decades at near the same level at different stages.
In 1980 the PE ratio of the SP500 companies was 8 to 10 , currently it’s above 30 on trailing earnings and closer to where is was near the top of the market in 2000.
While that long sideways action was occurring Bright and Visionary young men started a number of businesses .. Many out of garages with no money and lots of ideas! In The late 1970’s and early 1980’s consumer’s attitudes changed to buy American as the Japanese were at the time on top of the world…(Boy .. what a wake up call Japan has gone thru !!)
Now those visionaries have untold amounts of money and rather scant ideas (except in medicine).
Once again we have a struggling manufacturing sector that is facing untold challenges, such as low priced imports and exporting of both manufacturing and white collar service jobs overseas where we do not have nearly the same international relationships we had with Japan in late 1970’s and early 1980’s.
In 1990 the PE ratio was near 17 and post Desert Storm period it stood in the 20’s as the visionaries drove the economy forward. At that time, baby boomers were just entering their later aggressive work and wealth accumulation years. The equity market never broke long-term trend lines and moving averages.
In the face of a multitude of negative events the visionary men and the market moved forward.
Are those same things happening now ? Hardly…
Granted the Fed is producing an environment for growth . the Govt is returning money to businesses and taxpayers.. but where is the vision for the post 911 economy .. the not so young any more visionaries appear stumped except for the medical industry .
However the population will rapidly in historical terms get older and leave the workforce only to be replaced by fewer younger individuals… Who in my opinion , at some point AGAIN show clear vision and repeat the raging bull cycle in equities.. however that may be YEARS away
Thus leaving the current market situation in sort of a funk that really goes nowhere for quite some time. As it tries to deal with a little mentioned economic theme from the past A POINT OF DIMINISHING RETURNS, which so far corporations have handled nicely (productivity) with reductions in employment .. lower borrowing cost and a consumer who continues to spend .. But what if that changes .. rates go up.. the consumer ages ?
We have now seen thirteen rate cuts and massive tax cuts however not a job gained.. At some point businesses should be encouraged to show innovation from ‘want and need with disregard for economic gain but businesses still value economic gain as productivity reins supreme !
The current situation is nothing like 1982 or 1991, it appears that we are more like the early stages of the long sideways action prior to1982.
Happy Trading !
Sunday Aug 3rd 2003
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