Auto Sales Up, Stock Market Down

 |  Includes: DIA, QQQ, SPY
by: John M. Mason

Auto sales jumped 8.5 percent year over year in April for industry automakers.

U.S. pickup truck sales boomed in April, contributing to double-digit sales gains at Detroit auto makers as improving home construction spurred new-vehicle purchases by contractors and tradesmen.

Housing prices were up 9.4 percent in February, year over year according to the S&P Case-Shiller home price index. This is the largest increase since May 2006.

Financial markets met the Federal Reserve's latest report on monetary policy from the Federal Open Market Committee with a yawn.

A Fed statement with very few changes was mostly met with disinterest in markets, although traders on both sides of the great monetary policy debate seemed to hold contradictory justifications for their positions.

People keep looking and looking for what was called in March 2009 "Green Shoots." They keep looking for signs that the business cycle is picking up steam…responding to the infusion of money injected into the economy by the Federal Reserve System…but, fail to see very little change in the way that the overall economy is behaving.

The Standard and Poor's 500 index and the Dow Jones Industrial Average reached new highs this week yet there seems to be very little excitement about it and the breaking into new territory does not seem to create any momentum.

To me, this behavior is very consistent with a general desire to see things improve so that life can get better for a lot of people and the world can go back to making money again…but, the economy still just struggles along.

The disconnect, to me, in this scenario is that people are looking for the typical, historical business cycle recovery. My view is that the United States will not experience a "typical" business cycle recovery this time around because of all the structural economic problems that exist within the economy.

Look at the capital utilization rate for all manufacturing in the United States. We are stuck around 78.5 percent of capacity. Capacity utilization has been trending downward since the 1960s. There are cyclical swings in this number, but the secular trend, I believe, tells the story.

Under-employment has been declining but is still way above where it has been during much of the 1990s and 2000s. Currently the U6 measure of under-employment is just under 14.0 percent. From March 2012 to March 2013 this number varied around the 14.5 percent level. But, the most important thing to me is that from 1995 up to 2009, this total was at or below 10.0 percent. (It went slightly above 10.0 percent in 2005 but then dropped below this figure until 2009.)

Reinforcing the situation in the labor market we observe the Civilian labor force participation rate at the lowest level it has been since very early in the 1980s. Many, many people have dropped out of the labor force.

To me, this is why economic growth is so weak. We are going through a period in which the economy must re-structure itself and this is going to take time. We will see "Green Shoots" here and there. But, we won't see sustained improvements in economic growth for quite some time now.

Look at the rate of growth of real GDP since the start of the Great Recession. In 2007, the year before the recession began, real GDP grew at a 1.9 percent annual rate. In the next two years, the recession years, real GDP declined in 2008 by 0.3 percent and in 2009 it declined by 3.1 percent. The next three years, the years of recovery, real GDP grew by 2.4 percent, 1.7 percent and 2.2 percent, respectively.

In the first quarter of 2013, real GDP rose at a 1.8 percent year-over-year rate of growth.

The prospects for much of a pickup in the rest of 2013 are very, very slim. With the structural problems I have mentioned above I cannot see the United States picking up by itself. And, with Europe deep in another recession, the growth rate of China declining, and general unrest in many parts of the world, help is not coming from elsewhere.

To me, 2014 and 2015 do not look much better. Re-structuring takes a long time and monetary and fiscal efforts to achieve a regular cyclical recovery are pretty helpless.

And, with economic growth at such a slow pace, business profits cannot expect to be too buoyant. Various sectors will do alright, especially those that will be major contributors to the economic re-structuring that is going to take place in the United States economy. In general, though, profits over the next year or two are not going to be too robust.

If that is the case, then, in my opinion, the stock markets are over-valued. Using the CAPE measure of the economist Robert Shiller, the S&P 500 index is too high and will not drop because of a "catch up" in corporate earnings.

This "catch up" may not come in the near future because of all the liquidity the Fed is pumping into financial institutions and financial markets. Shiller's work has shown that the stock market will "revert to the mean" of the long-term average of the CAPE measure, but it can remain above (or below) the mean for a long period of time for reasons that are present in the environment at the time.

In the current time, the major reason that the CAPE measure might stay above the mean for a longer period of time is because of what the Fed is doing. As I have stated quite a few times before, the funds the Fed is pumping into the economy are within the financial circuit and are now spilling over into real economic activity. Thus, the Fed's actions are having little or no impact on economic growth and, while the funds stay in the financial circuit, these actions are having little or no impact on consumer prices.

So we have got credit inflation in the financial sector with little or no price inflation in the real sector.

In such an environment, "Green Shoots" will jump up in one place and then in another but there will be little or no real improvement in economic growth. The financial markets seem to be flush with funds so that we will continue to avoid any major problems related to the solvency of financial institutions. With such a forecast I don't see any substantial stock market moves. And, the thing protecting stock market investors on the downside is the abundance of money the Federal Reserve has supplied the economy.

As a consequence, I really can't see the stock market getting out of the general range it has moved in over the past thirteen years.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.