The S&P 500, DJIA, and NASDAQ are all up about 40% from their lows on March 9th. Why? Has the economy (and earnings) rebounded that sharply? Or were the March lows an aberration? It’s been a while since I talked about the stock market or the larger economic picture, so it’s time to revisit those themes.
First, the economy. From the data to date, it appears that the broad US economy is shrinking less rapidly than it was just a few months ago – but it’s still shrinking. The GDP shrank at a 6.3% rate in the 4th quarter of 2008, and it shrank at a 6.1% rate in the 1st quarter of 2009. These are the revised (as of May 29th) numbers straight from the BEA here.
Passenger: “The GDP is better than it was before Captain – can we start the party?”
Captain: “Ummm, let me think…. The ship is still sinking…. But it’s sinking at a slightly slower rate. Re-arrange the deck chairs again, maybe that will help. Party on dude!”
Ok, so the economy isn’t growing – what’s behind the 40% rise in stocks? Could it be earnings? Maybe companies have laid off enough workers, and streamlined operations enough so that their profits are 40% higher than last quarter? Let’s look at the numbers….
With 99.43% of the Q1 2009 earnings reported, the total earnings of the S&P 500 adds up to $7.61. That’s certainly a lot better than the negative $23.25 the S&P 500 earned during Q4 2008! Keep in mind that Q4 was the first time ever for “negative earnings” for the S&P 500. And another word for “negative earnings” is “losses”. Or “deficit”. As in “the US Government has $1.85 trillion in negative earnings for fiscal year 2009.”
Anyway, $7.61 in earnings must be a good thing if that has caused the stock market to surge about 40% in the past 3 months right? According to Standard and Poors latest spreadsheet, no. Except for last quarter’s losses, As Reported earnings haven’t been this low since Q4 of 2002. And the Operating Earnings (currently $10.15) haven’t been this low since Q4 of 2001.
Ok, so actual earnings aren’t driving the market higher – what if the earnings are low, but beating the estimated earnings? In other words, what if company earnings suck, but they suck less than investors expected them to suck? Sorry Charlie, according to Howard Silverblatt, S&P Senior Index Analyst, “actuals are -24.3% off estimates, and -43.5% behind last year”.
Of course, Howard goes on to say that the “Operating vs As Reported (top down vs bottom up) varriance enormus; out of the woods or the Island has moved.” I’m not sure what it means when the Senior Index Analyst at Standard and Poors can’t spell “variance” or “enormous”, but it can’t be A Good Thing.
In the same note, Howard also says “189 issues beat est, but only 87 beat last years earnings; 290 missed with 72 beating last years EPS” which translates (seriously) to “189 out of the 500 companies in the S&P 500 beat their earnings estimates.” 189 out of 500 is about 38% – that means that 62% of the S&P 500 MISSED their earnings estimates. And yet the stock market is 40% higher.
Ok, so maybe the forward PE ratio is finally coming down to reasonable levels? It was at a record 60 to 1 at the end of Q4, it must be better now…. Or at least when we look at the estimates for the rest of the year…. Right?
Wrong. The current PE ratio for the S&P 500 is 114.77, another record high. And it gets even worse when you look ahead. Here are the current estimated PE ratios for the S&P 500 for the rest of 2009.
- Q1 – 132.22
- Q2 – 3513.31 !
- Q3 – Negative 301.52 (first negative annual PE in history)
- Q4 – 33.46
To sum it up, I see no reason for the current level of stocks. Zero. The S&P 500 index (currently at 944.74) is too high relative to earnings – and in the long run, stock prices are based on earnings. This minibull may continue for awhile, but prices WILL eventually adjust to the low earnings. And from where I sit, that means stocks will drop back down to at least the March low sometime this year.
The only possible way I can see stocks continue to rise is inflation. Specifically, inflation caused by the enormous amount of money the Fed is printing out of thin air and injecting into the money supply. In that case, stocks can – and will – go higher. But the actual price increase will be close to zero when adjusted for inflation. And if you want to maintain your purchasing power, gold and silver (in your physical possession, not an ETF!) are, in my humble opinion, much better inflation hedges than stocks.
I could go on and on about how Geithner, Helicopter Ben Bernanke, a willing Congress anxious to be seen as “doing something”, and Obama are making the mess worse – just as Greenspan, Bernanke, Bush, and a willing Congress created the problem – but that’s another story for another day.