What’s Driving This Market? It’s Not What You Think. (Part 2)

by May 8, 2019Article, Financial Management, Stock Market0 comments

My how things have changed.  It the good old days, the stock market reflected the real-world economy and the profits businesses extracted from it.  These days, that’s no longer the case.  The truth is, the “best economy ever”  according to President Donald Trump, with trademark hyperbole, isn’t really working for the stock market and really isn’t working at all for ordinary Americans.

Let’s put things in perspective.  From the end of the first quarter of 2012 up to today’s fresh all-time high on May 1, 2019, the S&P 500 Index has risen by 109.7%. Meanwhile, pre-tax corporate profits declined from an annual “run rate” of $2.20 trillion as of March 31, 2012, to $2.18 trillion as of December 31, 2018.

The stock market got off to its best start in 13 years in 2019, but these nose bleed stock averages isn’t a result of the work on Main Street.  When we look at last Friday’s GDP report on the first quarter, according to the Department of Commerce, the U.S. economy grew at an annualized rate of 3.2% over the three months ended March 31. But this was a low-quality report. This reality show is the result of massive share buybacks, one-time tax law changes, accounting games and a shift from smaller, unlisted companies. Real final private sales grew at a puny annualized rate of 1.3%.  This could be the deepest decline in nearly a decade.

David Stockman opined“Consumer durables production virtually collapsed, falling at an annualized rate of 15%. That takes out all the gains since 2016. In fact, we’re back to the late stages of the 2008-09 recession,”  on May 1, 2019.  It’s worth noting that Stockman is the former Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.  These days Stockman is not in the business of defending a POTUS, nor is he representing a brokerage firm.

Stockman went on to say, “Here’s more ‘low quality,’ fresh from Commerce on Monday: The steepest drawdown in the savings rate in six years accounted for all of the 0.7% growth in consumer spending in March.”  Some observers, including this one, are convinced that the “best economy ever” is nothing than a debt-fueled sugar high.

Some economists got excited all over again when China’s Statistics Ministry reported earlier this month that the Middle Kingdom’s GDP growth for the first quarter was 6.4%. That beat a consensus forecast of 6.3%.

Do you notice a pattern here?  A simple Google search reveals that China “beats” by 0.1% practically every quarter.

Beijing sets the growth targets and filters them down through the party apparatus. That includes the giant state-controlled banks and industrial enterprises. From there, the government provides whatever it takes – new credit, fresh bribes, sometimes punishment, too – to deliver the plan. It would appear  America is learning from China.

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