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July 16, 2020 | The Real Economy Has a Message for Stocks–and It’s Not Bullish

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

After plummeting between February 20 and March 23, the S&P 500 (below in white) rebounded sharply and is closing in on levels that prevailed at the start of this year. Unemployment meanwhile (inverted in red below), is over three times higher than it was before the Covid-19 outbreak and the highest in decades, as shown in this chart from Crescat Capital.

The chart below from my partner Cory Venable shows a similar picture with US industrial production in blue since 2003 versus the wildly unhinged S&P 500 price in July (red line).

 

Bulls scream at times like these, “The economy is not the stock market stupid”. True, but textbooks confirm it’s supposed to be a leading indicator of the economy.  In recent cycles though, increasingly extreme plunge protection efforts by policymakers have succeeded in intermittently stalling the market’s mean reversion lower from nose-bleed levels.  Stalled, but not stopped, it must be said.  Stock prices have ended up catching down with real-world economic indicators each cycle eventually.  Oh, and profit margins too.  As shown in this other bothersome picture from Crescat Capital since 1989, estimated S&P 500 profit margins (in red) also have a signal to share about stock prices (white line) in the months ahead.  And it’s not bullish.

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July 16th, 2020

Posted In: Juggling Dynamite

One Comment

  • Dave Ktver says:

    I am sorry, but with all due respect to your guest, she is wrong…..VERY wrong! George Soros has tried to tell the investment world for 40 years that the thesis that the stock market is a reflection of the real economy is incorrect. His concept of “reflexivity” explains clearly how a rising stock market can actually contribute to a rising economy. Their relationship is a more of a dialectic than a 1:1 correspondence, although Soros does not like the Hegelian term to be used when describing the finance markets.
    I have always had a problem with analysts who tell me it SHOULD be raining, despite the fact that the sun is shining, which is why I long ago turned to algorithmic trading for my own account: if the market’s going up, I’m buying; if it’s going down, I’m selling. Simple.
    But, of course, such simplicity would tend to put a lot of the finance industry out of business, and make all those CFA’s useless, which isn’t a bad outcome, in my opinion.
    At some point, all this pseudo-intellectualism used to describe the markets turns from the sublime to the ridiculous. There are simply too many interconnected variables for any individual or collection of individuals to arrive at an accurate conclusion about the direction of the markets, especially using the theories taught in all current finance classes. Benoit Mandelbrot, a mathematician, calculated that the odds of having a one-day drop like the one that occurred in 1987 USING CURRENT FINANCE THEORY AS TAUGHT IN UNIVERSITIES AND THE CFA PROGRAM, are about 1 in 10 to the exponent 50. In other words, you should be able to invest for more than a trillion, trillion, trillion years and never have such a drop.
    Oh, and while we’re at it, Mandelbrot, looking at the markets as a dta set, not as someone with a bias or vested interest, concluded that the markets have infinite variability. i.e. they aren’t predictable.
    Clearly, current financial models based on theories about central banks, money flows, and the usual CFA jargon long ago ceased to be anything worth following, and have become more like a bad joke.
    I pity the average investor who relies on the myopic advice of so-called professionals in order to secure their retirement.

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