From the March 01, 2011 issue of Futures Magazine • Subscribe!

Can equities continue to climb wall of worry?

Other than a mild dip in spring 2010, the stock market has enjoyed a near two-year uptrend. While much of the world still is trying to clear the dust and debris from the collapse in 2008, equities have disengaged themselves from the rest of the economy and are approaching pre-recession highs (see "Back from the brink").

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A disconnect largely has been created where earnings and equities are continuing to rise while the U.S. economy continues to battle unemployment and sluggish growth. The January non-farm payroll report, released on Feb. 4, showed that the country only created 36,000 new jobs though the unemployment rate dropped to 9% from 9.4%, which has been attributed to faulty seasonal adjustments. "While the markets are up and earnings are up, it’s not necessarily all driven by positive, good, healthy economic growth. A lot of it is just temporary money sloshing around," says Chris Mayer, managing editor at Agora Financial.

It is tough to distinguish real growth from the effects of government stimulus and the Fed’s quantitative easing. "The economy is not growing very fast. I mean 3.2% GDP on $14 trillion stimulus is pretty pathetic," says Keith Springer, president of Springer Financial Advisors. "It was enough to prevent another catastrophe on the downside, but the economy has to find equilibrium [and produce real demand]."

Springer says the equilibrium is forming as corporate earnings are rising not as a result of an increase in demand, but because of scaling in production to meet current demand. Jobs, though, are still the heart of the matter.

"[Companies] got rid of all the fat they possibly could in the recession. Into recovery, we haven’t had an increase in hiring," says Paul Larson, equities strategist at Morningstar. "So, they are working their existing [employees] just that much harder when you look at the number of hours worked and productivity numbers."

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