David Rosenberg, the bearish strategist at Gluskin Sheff, is both mind-boggled and impressed by the disconnect between stocks and the economy.
“The Fed has managed to negotiate a divorce between the economy and the stock market,” he writes in his latest Breakfast with Dave note. “It is truly a Houdini act of epic proportions. The major averages are flirting with five-year highs even in the face of soft employment, sub-50 ISM readings, negative core retail sales and durable goods orders as well as tumbling industrial production. Not to mention what FedEx had to say yesterday…and of course, the fact that operating earnings are following reported EPS on a contrationary path.”
However, Rosenberg argues that the Federal Reserve’s efforts to do everything it can to push interest rates as low as possible makes for a bullish case for stocks:
…Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises the future profit expectations. It’s that simple. And the fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also lifted the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.
Photo: Gluskin Sheff
Furthermore, Rosenberg also conducted some correlation analysis and found that “almost 74% of the stock market movement can be explained by the level of the Fed’s total assets ALONE since the QE1 announcement.”
So assuming the Fed buys the maximum amount of bonds as outlined is its latest FOMC announcement and expands its balance sheet by $40 billion per month, Rosenberg estimates that could add another 19 points to the S&P 500 each month.
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