There are times when the stock market and the economy diverge. In March 2009, for instance, when stocks started higher, the economy was still far from reflecting a turn. Today, the market is pricing in better days, but the economy is still flashing red. Only time will tell if the market has forecast correctly or not. For now, 5 economic issues still need reconciling.
1. There's a glaring issue with the most important data point measuring economic health. Real Gross Domestic Product (GDP) was just revised higher, but to just above zero. At 0.1%, the expansion in the fourth quarter could not have been any closer to recessionary territory. Furthermore, we know the sequester cuts will cost the economy approximately 0.6% GDP points this year, part of a 1.5% weight that the Federal Reserve says fiscal policy is adding prematurely to our backs in 2013.
2. Corporate earnings estimates are being revised lower, and that is a bad economic signal that is especially hard for stock investors to ignore, and yet they are. FactSet (FDS) reports that all 10 sectors reported downward revisions to Q1 2013 EPS estimates. There were 82 companies warning on first quarter earnings, while just 25 pre-reported positive surprises.
3. The improvement reported by the government in the Employment Situation Report is questionable. My review of the report indicates that an employment participation rate closer to that of 2006 would have unemployment at 11.8% and underemployment at 18%, and neither improved over the prior month's data, as was reported by the government.
4. Small businessmen, who drive the American economy and employ a great number of Americans, are so pessimistic in this period of economic growth that the National Federation of Independent Business' (NFIB) Small Business Optimism Index is lower now than it was at the trough of two previous recessions.
5. The well-being of the European economy is in serious question, with the European Central Bank (ECB) recently revising its expectations lower. Germany is facing recession and people are so fed up across Europe that the Italians almost brought back Silvio Berlusconi. The Greeks, who fought so valiantly in World War II that Winston Churchill said heroes fight like Greeks, have a backward faction today raising flags in protest that makes me so angry I want to go knock a few ignorant brethren out. My father almost starved to death in the war and lost an Uncle as a refugee in Egypt, escaping only through that famed friend of Greece, Turkey on a boat so full of desperate people that it had just an inch left between it and the sea before it would fill with water in the middle of the night. A Nazi pig put the bottom of his boot onto my uncle's preteen forehead, after he traded them wood for bread, and pushed him down a cement staircase without the bread. That was when they decided they had better leave. I just hope that the world realizes that the ignorance of a handful of Greeks does not represent nor even hold a candle to the love of many more God fearing Greek people who fought against fascism at great cost.
I suspect I could dig up a few more economic issues than this, and I welcome readers to add their own pet peeves within the comments hereunder. We have not even broached the schizophrenic state of affairs in Washington D.C., and yet on Tuesday, as the Dow was flirting with ending its streak of higher highs, the SPDR Dow Jones Industrials (NYSEARCA:DIA) and the Dow itself broke into green ground just before the close (marking 8 straight days of gains). Still, the SPDR S&P 500 (NYSEARCA:SPY) and the PowerShares QQQ (NASDAQ:QQQ) ran out of trading time to get there, and closed down 0.2% and 0.4%, respectively.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.