Merely pointing out that fundamentals are improving is no counter-argument to bearishness, argues David Rosenberg of Gluskin-Sheff:
We hear this all the time; almost as many times as we hear “but we’re off the lows
for the session” on CNBC almost every day since the highs were put in three weeks
ago. It’s not always about how great the lagging or coincident indicators are
(especially when the ECRI leading index is down to a 40-week low). As we have
said time and again, to some testy retorts we must add, overvalued markets are
more vulnerable than undervalued markets. Simply put.
We had a nasty near 20% correction back in the summer and fall of 2002 and
yet we had come off a 3.5% annualized GDP quarter to start the year, which at
the time got a lot of folks in a tizzy. Real GDP printed +8% in the second
quarter of 2000 just as the Nasdaq was rolling off the highs, and never to look
back again at those lofty peaks – not to mention the huge 300k job gains at
the time. By the first quarter of 2001, GDP was falling at a 1.3% annual rate.
Who was calling for that a year before when the fundamentals were viewed as
being so solid by the economic elite at the time.
What about 1998? In the same quarter that the S&P 500 cratered 20%, due
no less than to the fallout from the Asian crisis, real GDP in the U.S. was up at
a ripping 5.4% annual rate and nonfarm payrolls were rising 250k per month
to perpetuity, or so it seemed. We had a big turndown in the financials back in
1994 and lo’ and behold, it took place with real GDP advancing at over a 4%
annual rate and payrolls increasing 300k per month.
Then in the mother of all corrections in October 1987; that same quarter of
the collapse, we had real GDP up at a resounding 7% annual rate and
employment rising 300k per month yet again. So, the message here is to
trade and invest carefully in an overvalued market, which is what each of
these periods had in common.
And besides, the fundamentals aren’t even that good…
As for the current situation, the fundamentals are actually less solid than
many on Wall Street are letting on. It will be interesting to see what the fallout
is on spending and confidence from this latest market downdraft (it seems
more than a 10% correction, doesn’t it?) and intense volatility since the only
reason why everyone was of the belief that the economy had made the full
shift from recession to recovery was because the 80% surge in equity prices
told them that this was the case. Yes, the same stock market that peaked
right when the recession did in the fourth quarter of 2007 may yet again have
peaked right at the highs of this nascent, but fragile, renewal phase.