How Can Stocks Be So Good When the Economy’s So… Not?

I really hate to be so negative, but I really don’t get the rally in stocks.

Just last week alone September retail sales disappointed, consumer inflation flat-lined and a couple major regional manufacturing surveys showed contraction. In other words, economic activity is actually shrinking. The Fed’s September index of industrial production showed another contraction, which was the fourth in five months.

I’m not cherry picking the bad economic reports here. I really can’t find many “green shoots” in the picture.

Our unemployment rate of only 5.1% seems to be positive, but wage growth has been absent. Home sales and auto sales have been strong, but a lot of this is a result of the Fed keeping borrowing costs so low. And those seem to be the only sectors holding up the entire U.S. economy!

Aside from the poor economic data, it’s also earnings season. Corporate earnings have been coming in a little better than expected, and that could be the reason stocks (S&P 500 and Dow Industrials) are only 5% away from all-time highs.

Of course, it’s not hard to beat expectations when they’ve already been revised down. Just this past Friday, General Electric posted better-than-expected earnings, but its revenues fell short. We’ve been seeing a lot of that lately.

Many companies have resorted to share buybacks and accounting mirages to boost or stabilize earnings per share. With the Fed’s zero interest rate policy this has been a cheap game to play.

So, stock prices continue to be buoyed by Fed policy and not by improving profitability or growing revenues. But when the music stops and companies run out of accounting gimmicks, look out below!

Why am I so focused on stocks? Because when the shoe drops and stocks finally correct, the money will naturally flow into the safety of U.S. Treasury bonds.

In fact, bond investors are already starting to position for a major slow down. See the chart from last week, which shows a strong technical pattern supporting future lower yields.

30 Year US Treasury Bond Oct 20

Lance Gaitan

Editor, Dent Digest Trader

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Categories: Stocks

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.