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What the Stock Markets’ Gains Really Mean

Optimism may be misplaced given these conflicting signals

Wall Street analysts may regard the U.S. economy in a favorable light. Indeed, many believe that higher stock prices reflect optimism about the country’s economic future.

Yet Gallup’s U.S. Economic Confidence Index portrays an entirely different picture. More and more Americans believe the economy is getting worse. In fact, even as U.S. stocks push upward to record heights, the perception about future well-being is fading rapidly.

US-Gallup-economic-confidence-currentoutlook-2016-07-19

Is the pessimism misplaced? Possibly. The official unemployment rate is below 5%. Property prices are climbing through the roof. And the current recovery (6/09-Present) is now in its 84th month.

On the other hand, the upbeat economic narrative in the media is misleading. The reality for 25-54 year olds? 19% of them are not participating in the workforce. That percentage was significantly less (17%) at the start of the recovery from the Great Recession. According to Doug Short at Adviser Perspectives, 2.7 million additional 25-54 year olds would need to be employed today in order to match the unimpressive labor force participation percentages from 2008.

Labor Force

What about real estate? Shouldn’t Americans be feeling more optimistic because their homes have increased so much in value?

Unfortunately, the percentage of Americans that even own a residence has dipped to rates not seen since the late 1970s.

President Homeownership

The longer-term economic trends in home ownership and employment are disheartening. However, confidence about the economic future (in the Gallup Economic Confidence Index) did not begin to deteriorate in earnest until February of 2015. And that’s not too far removed from the date of the last asset purchase via quantitative easing (“QE3″) by the U.S. Federal Reserve (12/18/2014).

In other words, Americans have become increasingly concerned about the future of the economy ever since the central bank of the United States stopped increasing its balance sheet. Put another way, since the Fed ended the creation of electronic dollar credits for the purpose of “stimulating” the economy, more and more people are wary about the future.

Balance Sheet

Some market watchers believe that new highs for U.S. stocks (July 2016) confirm economic strength. Others, myself included, believe recent stock highs are confirming economic weakness.

Consider the treasury bond yield curve. When U.S. stocks last traded at all-time highs (May, 2015), the treasury bond yield curve had been steepening. The steeper yield curve confirmed investor faith in stock assets. The new highs here in July of 2016?

They are happening in spite of a yield curve that has been free-falling for an entire year.

10-2

There is another way to look at the diference between the stock highs then and now: a stock-bond price ratio. A quick visual of the S&P 500 SPDR Trust (SPY): iShares Treasury 7-10 Year Treasury (IEF) price ratio demonstrates that the U.S. stock stampede is more like a crawl when compared to the demand for the perceived safety of government debt.

SPY IEF

Granted, the stock rally off of the January lows has been spectacular. And the bounce-back from the Brexit vote was tremendous.

Nevertheless, if one honestly assesses U.S. stock performance since the Federal Reserve suspended the creation of electronic money (December 2014)? Since QE3 culminated? Investors have seen very little reward for the risk of particpation.

SPY IEF December 18

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert. Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFsmutual funds, and/or any investmentasset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/stock-market-gains-a-vote-of-confidence-for-the-economy/.

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