Beware rising expectations.
Much of the current rally in U.S. stocks—the S&P 500 Stock Index was up 10% from the February 8 low as of the close yesterday, March 16—is based on a belief that the U.S. economy will continue the strong recovery foreshadowed by the 5.7% GDP growth rate reported in the fourth quarter of 2009.
That belief got a boost yesterday when the Federal Reserve’s Open Market Committee said in its post-meeting release that business spending on equipment and software had “risen significantly.” (In Its January statement the committee had said only that such spending “appears to be picking up.”)
In addition, the committee raised expectations that the improving economy would soon start being felt in sinking numbers of unemployed. Yesterday’s statement said the labor market was “stabilizing.” In January it said only that the rise in unemployment was “abating.”
No wonder then that the consensus among economists is now that the U.S. economy have actually started to create new jobs in March. The number I keep hearing is a forecast for 300,000 new jobs in the month. (That will leave just a bit to go since 8.4 million jobs were lost during the Great Recession.)
If the economy delivers, great. It will encourage belief that the U.S. has turned a corner and reduce worries about the second half of the year. And the rally will continue.
But such optimism always carries the risk of disappointment.
And any disappointment on the jobs number will do damage to stocks since prices are already anticipating at least some of the good news.
The Bureau of Labor Statistics will release March jobs and unemployment numbers before the stock market opens on April 2.
trailing eps is on the rise as far as I see. current year estimates too. I would buy only stocks with real earnings, good price to cahs flow ratios, good return on equity, low or reasonable p/e. I would act as Buffett always said: When others are scared, buy stocks. Maybe somebody can explain me the Fed Model Risk Premium ? It now tells investors that this market is undervalued !
As to the market being pumped up by government or banks I simply do not believe it. My view is that the market cannot be manipulated by anyone or any entity for a very long time. The market is the sum of the actions of us all. Who can really predict the way a mass of people, institutions, sovereign funds, will react ?
If currencies are all very uglies as they always have been, Waht’s left to buy ? Either stocks with tangibles goods or gold ?
Maybe stocks are now considered more worth than money ? Is it what’s called the monetization or smthg like that, of the stock market ? Should this be the case, I would expect the Dow Indu to rise much much more.
Good luck to all
I have been hearing a lot of talk about having a considerable amount of cash right now. Jim would you comment on what that cash is waiting for, a week to week dip from Greece, or a semi-annual slump from Global unforeseen catastrophe?
I have a lot less faith in cash now as compared to 5 or 10 years ago. Commodities surged last year. Is it commodities going up or dollars going down and what makes it one or the other?
ok my 2 cents, the Easter Bunny is coming just like Jim told us.
However the tone Jim used in the article makes me think the Easter bunny isn’t bringing much.
Nor am I expecting much.
jackandcyn yes you are right I’m getting tried of 1.10% will 3% now that teva has done well.
Well which is it Robert- are the banks buying stocks or are they buying treasuries?
Buying treasuries with money borrowed at .25% is a risk free way to make money while keeping your capital pumped up like Uncle Sugar likes it. Buying stocks, not so much.
Banks have enough problems without becoming hedge funds (unless you’re talking about the dedicated hedge funds like GS and the like) and buying stocks with borrowed money. Even at the height of the insanity they had truckloads of dogshit debt on their books, but not a lot in equities. It wasn’t levering up to buy stocks that created the house of cards.
I agree with Jim that if the jobs report sucks, there won’t be a huge selloff that sticks- because a lousy report means the spigot will remain open, and an open spigot is a money maker for pretty much everyone, no matter how you’re invested. If the jobs report is good, and the spigot looks to be turned off sooner as a result, look out, because nobody has a clue what the economy or the markets will do without 2.5 trillion in Central Bank and other government support propping it up. At the first sight of withdrawing the support the hedge funds will turn short and the longs will all run for the doors at the same time.
Isn’t that what Jim’s post on things to worry about told us?
Nobody ever went broke booking a profit and sitting in cash to see what happens next.
The FED untimately controls the money supply, and the fed,, is lending.. to the banks, and the banks are loaning the money to the federal government, and,,,they are manipulating the value of the market by buying key stocks.
And that is driving the market up.
HOW THE FEADERAL GOVERNMENT RIGS THE STOCK MARKET :
The fed loans money to the banks, the banks buy key stocks in the market ( IE the bank stocks, the Qs, the transports, etc and this rigs the market to go higher, and higher because the mrket follows those key stocks..
Actually, I should have said that the federal government just stands there and watches it happen.
If the big banks do not want the market to go down,,, it doesnt. if the big banks want the market to go up, it does.
jackandcyn: I think you’re exactly right. A market or economy doesn’t have to be perfect just better than the alternatives. A 2.2% gain since the beginning of the year for the S&P isn’t great until you look at yields (and interest rate and credit qualtiy risk) or until you note that Shanghai is down more than 9% for the year. In that light, one possibilty I didn’t mention in the post is that if there is a disappointment on jobs, the market after dipping shrugs it off saying “Job growth is just delayed.” As long as the U.S. is the best alternative among lousy alternatives that reaction is a real possibility.
BTW, I don’t think the government is engineering the current rally by buying stocks. (That is a fantasy.) It is, however, supporting financial assets of all kinds with low interest rates.
I’m aiming that the optimism continues up until the actual job report is released. I expect it to carry the same tone of ‘It was a big recession, the recovery isn’t everything we touted it to be, but it’s on its way..’ so we’ll see a small dip and then back to rising expectations until either we rise out of the recession, or another monetary superpower splashes us back down to earth.
Jim, the current rally has been on low volume and recently has been driven by riskier stocks (e.g., Citi). Do you believe that the eventual correction, let’s say because job growth is actually more tepid than forecasted, will be deeper than one that would have occurred had there been more normal volume?
Robert1234 – your “guru” believes that the federal government is manipulating the stock market? Really, how exactly – other than by means of hot air/commentary?
Aren’t we all supposed to believe in supply side economics, also know as ‘voodoo’ economics?
Just believe.
I know I sound like a broken record, but that stock photo of ‘young corporate executive in despair’ is great
My, aren’t we all paranoid. For what it’s worth, I think the market is rising because there’s nowhere else to put money. Money market funds are paying 0%, cds not much more, bonds not much more than that. What’s left but stocks. Look, for instance, at what’s happening with a stock like HCP. I love conspiracy theories, but I think individuals are desperate for return.
No offence to anyone, but every economy on the planet seems to be in trouble, and every one of them plans to export their way out of the problem, and the only economy capable of the necessary consumption is USA, and we are in hock to our eyeballs. And China” the Great Hope” is over built, and it’s banks are saturated with bad loans..
Who is going to consume to stimulate the global economy ?
Where will the spending power going to consume going to come from ? More debt ?
x
Me, my opinion is, the markets will keep going up, but only because big players want the markets to go up, and they and thier henchmen will print money into the sky…
Perpetual pessimest. me.
Where are the jobs going to come from ?
Who is going to do the hiring ?
My guru says that when the stock market has comsistant up closes, on low volume, it is manipulation by the frederal government.
My opinion for what it’s worth is, “THEY” are driving the market ( DIA ) above the 200 day moving average, where they will hold it, until the economy catches up with the stock market.
And every time it drops, it will drop the the 200 day, and “be bounced” back up again.
Jim-
re: ” since 8.4 million jobs were lost during the Great Recession”…
If the REAL employment rate is about double the official [17%, those no longer looking, etc.], wouldn’t that mean that the REAL number of jobs lost was significantly higher than the official number as well?
[Frinstance- my own job loss was never reported or recorded.]
Maybe I’m missing something here? Seems like it will take this new power-economy a bit longer to actually replace all the lost jobs, including those that didn’t make the official stats.
Thanks as always-
So if we are headed to a full disappointment, what is the best course of action?
So if we are headed to a full recovery, what is the best investment(s)