The S&P 500 has rallied a remarkable 12% since hitting its 2012 low in late May, even as data from hiring to firing to manufacturing to global GDP have gone sideways or slipped. Indeed, the broader market is at levels not seen since late 2007 and early 2008 — despite the fact that corporate profits are expected to decline after 11 consecutive quarters of growth.
Key global and domestic economic bellwethers, such as FedEx (NYSE:FDX), Norfolk Southern (NYSE:NSC) and Caterpillar (NYSE:CAT), have slashed their profit outlooks because of weak demand. For the S&P 500 as a whole, the number of companies cutting guidance versus raising it ahead of earnings season hasn’t been this bad since the trough of the 2001 recession.
“This [current] quarter is shaping up to be the worst quarter for corporate profits in three years, when the recovery was just getting underway, as the United States joins Europe and China in experiencing falling profits,” writes Jeffrey Kleintop, chief market strategist at LPL Financial (NASDAQ:LPLA). “The currently sluggish U.S. economy, European recession, and slowing Chinese economic growth — not to mention the threat of the fiscal cliff — all suggest that this is probably not the last quarter of disappointing earnings growth.”
So what gives with the stock market? Chalk it up to Don’t Fight the Fed — or the European Central Bank. Expectations and then delivery of more quantitative easing at home and bond-buying abroad have put lipstick on the increasingly ugly macro pig.
“There is no getting around it,” writes David Rosenberg, chief economist at strategist at Gluskin Sheff. “The markets are stuck is this game of tug-of-war between increasingly soft economic data and the power of central banks to inject bouts of liquidity and hope into the markets.”
Hey, if things were going so great, the Federal Reserve and ECB wouldn’t be pulling out all the stops. In the case of the Fed, wags are already calling QE3 the “Buzz Lightyear” easing, because it’s set to go to infinity and beyond.
Economists, on average, forecast U.S. gross domestic product to expand at an annualized rate of 2% in the fourth quarter, according to latest Wall Street Journal survey. That’s not much better than the expected pace of just 1.9% for the current period, and — yup — still woefully inadequate to make a dent in joblessness.
Furthermore, that GDP rate would represent no pick-up from the same anemic 2% pace we saw in the first three months of the year. By comparison, in the final quarter of 2011, GDP grew a healthy 4.1%.
But there will be no such luck this time around. The bottom line is that apart from much better news out of the U.S. housing market, most of the data are not very reassuring.
“While the housing recovery appears to be gaining momentum, the manufacturing sector now appears to be losing it,” notes the economics group at Wells Fargo Securities (NYSE:WFC). “Data from the manufacturing sector … and labor market continue to flash warning signs.”
On the global stage, it’s now looking more likely that China’s GDP will slow to well below 8% for the year. The European Union (collectively the world’s largest economy) and the eurozone are in recession. Even mighty Germany barely grew in the second quarter, notching an annualized rate of just 1.1%.
That’s why markets other than the stock market are saying something very different about future expectations. The bond market is in the midst of its longest sustained rally since late 2008, for one thing.
And oil prices certainly aren’t signaling growth.
Heck, quantitative easing is supposed to give oil — priced in depreciating dollars — a big boost. And crises in the Middle East, with deadly protests and saber-rattling on the part of Iran, should be sending crude soaring.
But crude oil futures have just tumbled below $90 a barrel in New York trading. Why? Because supply is getting ahead of demand, with inventories hitting record highs for this time of year.
The bad news is that economic outlook for the fourth quarter is just not that pretty.
The good news?
The lower the expectations, the easier it is to beat them.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.