The first quarter of 2016 looks like a bust. Corporate earnings are expected to be sharply lower and have already started coming in.
The game, of course, is to lower shareholder expectations, so that when there’s an earnings beat on those lower expectations, the stock might actually pop higher. But who’s actually buying stocks?
I agree with John’s assessment from a few weeks ago. The Fed’s monetary policy over the last seven years has allowed corporations to borrow cheaply and use those funds to buy back their own stock.
According to John, older investors that helped move markets higher at the end of the last century are pulling money out of equities, and younger investors don’t have the capital to offset the drain. So, the bull market was fueled by low rates, corporate buybacks and cost cutting.
But how much longer can that last? It’s been seven years already!
So far, investors seem to be happy with the buybacks and cost-cutting measures as stock indices are trading near all-time highs. I guess never mind lower sales as long as the stock price remains at lofty levels.
Central bankers can pat themselves on the back for helping prop up equity prices at least.
As long as central bankers are willing to step in, equity prices seem to be immune to economic risk. But what risks are there? What is the economy telling us?
The Atlanta Fed just cut their GDP forecast – again – to 0.1% for the first quarter, down from 0.4%. A couple months ago, they were projecting 2.5%! And last week, the IMF cut their forecast for 2016 global GDP from 3.4% to 3.2%. The IMF warned that there is a higher risk the world will slide into stagnation.
March retails sales were lower and, taking out cars, were up only half of what was expected.
Wholesale prices also fell in March according to the Producer Price Index (PPI), and the Consumer Price Index (CPI) was up only 0.1% – below the expected 0.2%. Excluding food and energy from the calculation, the CPI was still only up 0.1% – and again, at half of what was expected.
But it doesn’t stop there. The March Industrial Production report fell by 0.6% and was pulled down by slowing car manufacturing. So even with exceptionally low interest rates, car sales are slowing. Utilities and mining also slumped sharply.
Then get this. March housing starts fell a full 8.8%, and housing permits, which represent future starts, fell 7.7%. That doesn’t bode well for new home sales, which will be reported next week. New home sales are a vital component of our economy. The ripple effect from new home sales includes construction and related employment, appliance sales, furniture sales and landscaping services. It’s a whole host of economic activity that disappears when the sales aren’t there.
The Fed is also confusing matters by adding “global risk” to their wall of worries, instead of just deciding monetary policy based on U.S. inflation, employment and economic growth.
Over the last three weeks, Fed officials have given nearly two dozen speeches. Some of them are saying now is the time for a hike, while others are saying the economy is still weak. They’re now in a quiet period ahead of next week’s FOMC meeting.
I think the Fed has enough data to encourage them not to hike next week. The question is: will they tip their hand to a likely rate hike in June? And will that possibility be enough to finally pop the stock bubble?
Editor, Treasury Profits Accelerator
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