From this morning’s Breakfast With Dave note, Rosenberg presents the basic argument that what goes up big will come down big:
There have only been two other times when the stock market ran parabolically
up from a low in barely over a year, as was the case this time around (+80%
from March 2009 to April 2010): the 112% surge from June 1, 1932 to
September 7, 1932; and the 116% runup from March 2, 1933 to July 18,
1933. In the first case, we had a 40% correction and in the second, the
correction was 34%. So, we are talking here about the prospect of a pretty
hefty reversal in the S&P 500 that could very easily take the index down to as
low as 850, if the history of these types of givebacks is any indication.
The problem for Mr. Market is that it went into this latest Europe-induced
ordeal with an excessively bullish GDP growth outlook for the U.S.A. – at the
April highs, we would argue that a GDP growth rate of 6% was effectively being
discounted. How nutty is that?
So, where next?
In the aftermath of the correction, the equity market is now pricing in a growth
rate closer to 3.5% — the fact that earnings have been rising while the market
has been correcting has helped cut the degree of overvaluation in half, to a
0.5 standard deviation from 1.0 just over a month ago on a Shiller normalized
P/E ratio basis. But the ECRI leading economic index is actually
foreshadowing a deceleration in real GDP growth, to 1.5% in the second half
of the year from the 3.75% average pace since the recession technically
appeared to have ended around mid-2009. The S&P 500 level that would be
consistent with that sort of pace would be closer to 850 than the current level
of 1,074. In other words, there is still more air to come out of the balloon.
As for the signs of slowing growth…
4. University of Michigan consumer expectations peaked on September 2009 (at 73.5) – now at 65.3 in May.
5. The UofM index of big-ticket consumer purchases peaked in February-March at 136; is down to 129 as of May.
Rosie: They had peaked at 651k on March 28, 2009. But they are back at 471k, which is where they were back on December 19, 2009 so the improvement has stalled out. Not only that, but to keep 472k into perspective, claims were at 453k the week after 9/11 (and the economy back then was eight months into recession). Yes, yes, employment has been rising of late; however, keep in mind that nonfarm payrolls are in the index of coincident indicators; claims are in the index of leading indicators. Please let's not drive looking through the rear window.
8. Mortgage purchase applications peaked on April 30th at 291.3 and now are at a 13-year low of 192.1 even though mortgage rates have come down 20 basis points since the nearby high.
9. Auto production peaked at 7.8 million units (seasonally adjusted annual rate) in January – was at 7.2 million in April.
10. Electrical utility output was down 0.1% YoY as of May 15th. Could be another early sign that the production revival is behind us.
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