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Stocks have staged an impressive rebound rally over the past three weeks, with the S&P 500 Index rising 9.2% from February’s low, but still down 3.2% year-to-date.
The upside move has been fueled in part by some better-than-expected economic data. Don’t get me wrong, the data remains downbeat, but isn’t as bad as many investors were expecting.
Case in point, the ADP employment report yesterday showed U.S. firms adding 214,000 jobs in February, which was a big positive surprise, well above estimates of 185,000.
As a result of this and other upbeat reports lately, the Citigroup Economic Surprise Index has turned sharply higher in recent weeks.
This is a gauge I follow closely, especially in turbulent markets. It measures the number of economic reports that come in better than expected (a positive surprise) compared with the number of data releases that disappoint (negative surprise).
When the line is below zero, as it still is today, it means more negative than positive surprises. But notice the steady uptrend in recent weeks. This tells me that while the majority of economic data is still missing expectations, the number of negative surprises is declining.
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In other words, the economy is getting “less bad” and that’s what
financial markets react to: Subtle shifts in sentiment!
So with the appearance of these “green shoots” for the U.S. economy, stocks, high-yield bonds, and other”risk” assets have rallied. But can it last?
That’s where I see more dark clouds gathering on the horizon, because S&P 500 earnings estimates are being slashed at an accelerating rate.
In fact, analysts are cutting first quarter 2016 profit estimates at the fastest pace in five years. Earnings estimates have plunged 9.6 percentage points in the last three months alone.
According to analyst estimates, S&P 500 earnings are on track to decline 8% during the upcoming first-quarter reporting season, and fall another 2% in the second quarter.
This would mark five straight quarters of contracting corporate profits. The magnitude of the decline in S&P 500 earnings is the worst since the global financial crisis, according to Bloomberg.
And history says this profit recession
points to trouble ahead for stocks!
Profits have fallen for five or more quarters only seven times since 1970, according to Bloomberg data, and six out of seven times the S&P ended up suffering a bear market decline of 20% or more.
Bottom line: Whether you want to blame a strong dollar, the collapse in oil prices, or declining global growth — the evidence of shrinking profits is clear to see and it calls into question the sustainability of the recent stock market rally.
Good investing,
Mike Burnick
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
{ 18 comments }
A good read Mike again backs up my theory that people are buying the good the bad and the ugly news. Graphs are showing that the bad is getting better and of course these are skeptical government numbers. My understanding was that employment numbers were due out Friday but it is my humble opinion that governments rushed them out on Wednesday to prop up the ailing stock market. It has been obvious for quite a while that the Fed is in the stock markets corner and we are laying on the mat receiving a 10 count. For years this was kept in the shadows but now its out in the open for all to see.
PS
I am of the opinion as well that the government will feed us positive news for the next little while to get the market moving up again. It seems world markets are following in tandem regardless of the their individual circumstances are. Its a dog and pony show at best. I follow the Baltic Dry Index and the health of real companies like Cat, Walmart and the banks which are all reporting to the downside. I for the life of me cannot see 214,000 new jobs being anywhere near correct. Nobody gives a breakdown of these so called “jobs” are they hamburger helper jobs what are they? Where are they? Then you have all the illegals crossing the border and taking jobs, coal mines, oil, problem retailers everybody is laying off people where oh where are these “jobs”
Gordon: There is an election coming up you know.
A breakdown of each month’s jobs report is provided each month and your thoughts are correct, most of these jobs are part time service positions far less than 40 hours and no benefits. A lot of the people getting these jobs are retired people who need to supplement their SS checks each month.
Nobody gives a breakdown of these so called “jobs†……you hit the bullseye
I agree with Jim’s reference to “these so called jobs”. Some professions such as nursing, software professionals, and engineers are finding “gainful employment”, however, others certainly are not finding jobs suitable to their education and/or experience. Skilled workers have it even worst since most businesses employing skilled workers are experiencing decreased earnings and if anything, they are “laying off” otherwise productive workers who earn a reasonable wage. Obama and the various federal agencies seem to want us to think that our existing unemployment numbers are O.K. when in reality it is truly under-employment. Service level jobs requiring little skill are not real jobs.
Uh-oh the optimists have gone from saying the economy is improving to saying it is not so bad. I have a feeling the World’s economy has fallen into a long time period of economic blah and nothing anybody does is helping, in fact all the government stimulus may be dragging it deeper into the swamp. FYI blah is that feeling you get when you ate something you shouldn’t have and your little tummy is not a happy camper and it makes sure you know it..
The labor statistics always tout the growth of new jobs, but NEVER say anything about how many people retired or lost their jobs. They do allow that the labor participation rate is declining, meaning that while our population increases, relatively fewer people are supporting themselves and their families. As Gordon and Jim mention, there is also never a mention of the quality of the jobs and their pay. Hamburger helper jobs (Good one, Gordon) aren’t going to really support families or pay taxes, which means increased dependence on a poorer government for many. That can only go on for a limited time, no matter what window dressing the politicians put on it.
The ultimate “how does everybody feel” chart. Left brained, but profit minded.
Maybe a little off topic but here goes.
What happens to those much massaged job numbers when robots make 50% of all jobs redundant by 2025 (recent report by CBRE)? Does government start taxing robots like people. I surely don’t think government will just give up that money to the corporations.
I would definitely like some perspective on this.
Some of the reason why robots are replacing people, is that politicians are making people more unpredictively expensive with changing minimum wage and other laws. Robots make fewer errors, also – until something goes wrong. And, of course the politicians will raise taxes on companies – companies don’t vote.
IF THE POWERS-THAT-BE MANAGE TO ENGINEER A SOFT LANDING AND WE SLIDE INTO THE SAME RUT AS JAPAN INSTEAD OF CRASHING INTO IT, WHAT WILL DENOTE THE ONSET OF THE YEARS-LONG SLIDE INTO MEDIOCRITY
I HAVE COME TO BELIEVE THAT WE ARE SLOWLY SINKING INTO A QUAGMIRE OF DEBT ASSUMING SO, WHAT WOULD BE THE LOGICAL APPROACH TO THIS UGLY AND PROLONGED DEBACLE
AND COULD ANYONE POSSIBLY BE ABLE TO SEE THE FUTURE BEFORE THE ELECTION RESULTS IN NOVEMBER
SHOULD I GO ON DEFENSE UNTIL MID NOVEMBER
Go defense, defense wins championships. The result of the debt debacle is default and war. The glass is half empty and leaking badly. Cheer up and have a good day.!! (<:
Mule
Earnings do not look good. But….it is an old canard that earnings power the market (try social mood).
Earnings have a short term effect but not much more. Chart earnings vs. the Dow on a long term basis and you will see varying correlation. Or, look at the numbers on your bar chart from 2011 to 2015 and compare to SPY.
A pro growth president can turn it around in one year. Rescind obamas exec orders,
lower corp tax rates, and cut freebees. We need a super salesman as pres , not a pol hack.
Notice how the professional politicians are totally against Trump – he is not “One of Them”. That, by itself, is a reason to vote for him. Of course, he will have both parties against him in Congress. GOP for Hillary, anyone? LOL!
LOWER corporate tax rates??!!?! Since a good deal of their profits are domiciled in tax havens overseas they aren’t paying commensurately ANYWAY………
Guess again, pal…
Clifford
Much about nothing. Unemployment could rise to 40% and the market will still boom.
Why? Simple, the FED. The market is not up for the last 7 years as a result of growth in the middle class,, but financial engineering built upon the FED’s printing presses. So, take a deep breath, just wait for the next iteration of the convert FED printing press. Fools are selling low so they can buy high after the next FED printing press run.