One of the pillars of the current market rise is the
perception that the economic recovery is accelerating to a point where it is
self-sustaining. But it’s been so long
since we’ve seen normal economic growth, most investors have forgotten what it
looks like. Results that are now being
hailed as evidence of more vigorous growth would have been regarded as close to
recessionary in past up-cycles.
Take GNP growth as just one example that is
representative of numerous other indicators.
Since the cyclical economic trough in June 2009 the average annualized
quarterly growth in GDP has been about 2.2%, a “new normal” that investors have
taken for granted as being just a precursor to more robust growth of, say, 3%
or 4%. What many forget, however, is
that the average quarterly post-war growth has averaged about 3.2%----and this
includes all years, including recession.
During expansionary periods, however, GDP has averaged
4.2% quarterly over the ten post-war cycles.
So far, in the current cycle, now approaching five years, this average
has been exceeded in only one of 19 quarters.
Furthermore, the entire rise in GDP since the last peak in the 4th
quarter of 2007 has amounted to only 6%, a far cry from the growth rate experienced
five years after prior peaks. We note
other key economic indicators indicate the same pattern of significantly
It seems to us that the slow growth pattern is beginning
to seep into the market’s consciousness. While the S&P 500 and Dow have
made new historical highs, indications of market deterioration continue to
persist. Market volume this week has
been more reminiscent of the period between Christmas and New Year’s rather
than anything close to normal. New highs
today were only 200, compared to the average of 600 a number of months ago.
Defensive stocks have been strongest while smaller more
speculative stocks have lagged. The
Nasdaq and Russell 2000 remain well below their tops. The VIX measurement of volatility is at
7-year lows. Investor’s Intelligence Survey
bulls are at 58%, compared to a bearish 17%, figures that are quite extreme
compared to the historical average. A
large majority of current IPOs are companies that are running a deficit,
reminiscent of late 1999 and early 2000.
In addition, both long-term bonds and gold do not act as if economic
growth was about to accelerate anytime soon. Therefore, despite the new highs,
it seems to us that the stock market is running out of steam.