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The stock and bond markets are sending two different messages. And, unfortunately for stock investors, the way I am reading the tea leaves, it’s the bond market that’s got it right.
That means profit-seeking investors need to be on guard and “put the hedges on” because as Warren Buffett reminds us, the first rule of making money is “never lose it.” And rule number #2 is “never forget Rule #1.”
And currently, we are in a situation where stock valuations are high on the expectations (and hope) that corporate earnings are going to have a strong year in 2017. And this makes stocks vulnerable to a pullback if corporate earnings don’t come through as anticipated.
The chart below is from respected economist Ed Yardeni’s weekly stock-market briefing.
Ed and his team spend a lot of effort putting this information together, and it’s a very useful tool for investors. To create the chart, Ed’s team surveys the leading stock market analysts on Wall Street and tallies their opinions about earnings-growth estimates for the specific sector or industry in which they provide expert coverage.
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After collecting all the information, Ed’s group crunches all the data together and provides an average-expected-earnings growth rate for the entire U.S. stock market as measured by the S&P 500.
Take a look at the upper right-hand corner of the chart. You can see for yourself the expected average consensus for 2017’s quarterly year-over-year earnings-growth rates as expected by the world’s-best analysts for the companies they cover.
As of April 20, that’s 10.3% growth for Q1, 8.0% for Q2, 8.9% for Q3 and 13.3% for Q4. Those are indeed high expectations for corporate America.
Now look at the chart below from the Conference Board. The Conference Board is an independent highly respected think tank that provides economic data to business leaders and corporations around the world.
This chart reports the expected overall growth in real GDP and consumer spending in the U.S. in 2017 and beyond. And it’s telling us that in 2017, the Conference Board’s world-renowned economists are expecting 1.9% GDP growth in the first half of 2017 and 2.3% in the second half.
What’s more, real consumer spending in the U.S. — remember that consumer spending represents about 70% of the U.S. economy — is expected to plug along at a corresponding average growth rate of only about 2.15% (1.7% plus 2.6% divided by 2) in 2017.
You should also know that the Conference Board’s numbers for economic growth in the U.S. are in-line with those from the U.S. Federal Reserve, the International Monetary Fund and the World Bank. This supports their credibility, meaning the Conference Board’s estimates are not outliers.
Now here’s the rub…
How do you get quarterly corporate earnings growth numbers in the U.S. of 10.3% for Q1, 8.0% for Q2, 8.9% for Q3 and 13.3% for Q4 for 2017 in an economy that’s only growing at about 2% in real terms?
Obviously, you can’t. It’s too big of a gap to bridge. The U.S. corporate sector can’t grow at about a 10% rate when the overall economy and consumer spending in the U.S. are only growing at 2%. It just can’t happen!
Now look at my favorite market metric: The yield on the 10-year U.S. Treasury. If you are a regular reader of my Money and Markets columns you’ll know why I believe it’s the perfect predictor.
Except for a recent dip, it’s trading in a post-Trump-election yield range of 2.4% to 2.6% which means that the bond market believes the economists’ forecast of anemic growth; not the Wall Street analysts’ view through rose-colored glasses.
That’s because there’s no way the yield on the free-market-controlled 10-year U.S. Treasury would be at its current level of 2.3% if the bond market expected high single-digit or low double-digit growth rates for the economy or in corporate earnings.
As a 30-year Wall Street veteran, I know that the debt markets are the best and most accurate indicator of market stress. And currently they are saying that expert Wall Street analysts are way off the mark. I also know that it’s often Wall Street’s job to sing a merry song to sell the products they are foisting onto their customers. Therefore, I’m always skeptical about the consensus Wall Street view.
So here’s the question …
The analysts or the economists — who do you believe?
As the editor of the Safe Money Report and proponent for the everyday investor, I’m siding with the economists and the bond market. That’s because as Billy Beane, of Moneyball fame says, “Hope is not a strategy.”
The best advice I can give you is “put your hedges on or have them handy.” Because when the Wall Street analysts wake up to the reality of the deflationary and slow-growth world in which we find ourselves, it will mean “look out below” for stocks around the globe.
Best wishes,
Bill Hall
P.S. If you’d welcome a way to build massive wealth in a very short period of time … and if you like the idea of doing it with renegade companies that are about to go “mainstream” in a big way, this short report will probably be a god-send for you. Read more here …
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
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And why is spending and consumtion in the ditch? It is becasue the Middle Class (The economic engine of America) is actually getting poorer while the Ultra Wealthy are getting richer. And it always happens that way when the Conservatives are in power…… Forbes did the research recently and after crunching all the numbers came up with exactly the same conclusion….. It’s kind of like the line from “Ghostbusters”: “So who are you going to call”?….
Want Consumption and Spending to increase? Then you have to make sure that the Middle Class is going to do bettter and that ONLY happens when the Liberal Progressives are in power……
False, the income gap become huge under Obama, not Bush. Although both parties are generally bad for the economy – it is the Democrat’s who reap the most from Wall Street donations. Wall Street knows what it is buying.
Here is the Forbes article mentioned above:
https://www.forbes.com/sites/adamhartung/2012/10/10/want-a-better-economy-history-says-vote-democrat/#1dc06df5cb44
Bill,
Your analysis of the markets are straight forward and easy to digest. The data that you provide is very useful for the average investor. Keep up the good work.
Thanks,
Jerry
“That’s because there’s no way the yield on the free-market-controlled 10-year U.S. Treasury would be at its current level of 2.3% if the bond market expected high single-digit or low double-digit growth rates for the economy or in corporate earnings.”
What free market? Global central banks, through near-ZIRP and QE are managing the debt markets, and that means the signals from the debt market are distorted and unreliable.
MEAN REVERSALS
Market expectations (analysts) are quite often a bit too optimistic, especially since the 2008-2009 financial crisis. Understandably, its their job to keep the gig going as long as possible. Its also Human Nature. Be Happy !
We have been borrowing from the future to fund today’s consumer desires and economic growth for some time now. Real economic growth has been hard to come-by. Similarly, Wall Street has been “borrowing” from the future by bidding-up stocks to higher and higher valuations ( P/E Ratios). The Federal Government has been spending like a drunken sailor, all at the same time. Today, the entire domestic economy, including real estate, has been fictionalized. Risk is nearly everywhere and unavoidable as a result.
At the same time, the market sages ( old school mostly ) keep reminding us of “mean reversion”. Its a perennial warning often ignored by the masses. Only a tiny minority of investors ever “see it coming” at the top-of-the-market or just before a major trend reversal. The crowd always follows the current trend, as does the financial media (pundits), most active mutual fund managers, and politicians. Top and bottom of markets often are characterized by extremes in investor sentiment.
The Fed, IMF, and world bank credibilities are about zero after last year. They needed an election to steer the course right, after botching it up for 2 years. Printing money hand over fist for lack of any real solutions.You should come up with a suitable, credible benchmark.
OK, just a couple of thoughts here. Economists, no matter how respected or world renowned, are still economist. Also, analysts are mostly over hyped salesmen. I do not place a lot of confidence in either.
Also, it is pretty much universally claimed that the “Stock Market” is over valued here. These claims are based on the current PE’s of the major indexes. These indexes are NOT the market and are very distorted by a handful of mega-cap names that ARE overvalued. The vast majority of the hundreds of other stocks in the indexes are NOT very over valued. Most of the eighty some companies which I own still have very reasonable PE’s and yields.
Bill,
in response to Wall Street selling hype; remember this and never forget it; “Figures don’t lie, liars Figure”
Hi Bill
Lower corporate taxes are a kind of protectionism.