My focus is on markets and less on individual stocks because, as is true, a rising tide lifts all boats, and when the market falls all stocks come under pressure as well, so with a careful eye on the markets and the macroeconomic conditions, I draw conclusions. During asset bubbles like the one we are in today, the conditions that exist within the economy seem to not matter, though those issues always end up mattering again at some point.
However, one thing that always seemed to matter in the past, during each of the other asset bubbles, was earnings growth. Specifically, during the credit bubble, growth rates were solid, and during the Internet Bubble, the prospects were so vast that a paradigm shift had investors looking ahead 15 years, but in the case of the Dow Jones Industrial Average even during the Internet Bubble, earnings growth was solid. Today, however, something is different, and no one is paying attention.
Investors are so enamored by the market's action that they have not looked at the real earnings growth of the Dow Jones Industrial Average (DIA). By real, I am not talking about a fancy trick that discounts certain parts of earnings, but real means the actual earnings and revenue as reported by the companies that comprise the Dow Jones Industrial Average.
Using the earnings comparison tool at Stock Traders Daily, I have compared Q/Q earnings and revenue growth rates for the S&P 500 (SPY) and the Dow Jones Industrial Average, and I could do it for all companies or specific sectors too, and in doing so I found something that Wall Street is ignoring.
For the past two consecutive quarters, the Dow Jones Industrial Average has had zero growth. In fact, this quarter revenue growth declined by 2.65% (25 companies reporting thus far) and earnings have barely budged. Last quarter, there was negative earnings growth with revenue growth less than 1%, and since the third quarter of 2010, the EPS growth rate for the Dow has been declining steadily.
The worst revenue growth rate in the Dow came from Caterpillar (CAT) with a 17% revenue decline vs. the same quarter last year, and in the prior quarter, Bank of America (BAC) posted a 24.3% revenue decline from the prior year, but luckily these were offset by other companies in the Dow. This quarter Microsoft (MSFT) had 17.7% Revenue growth, and last quarter United Technologies (UTX) had 14% revenue growth. Still, the Dow as a whole has no growth.
Officially, the growth rate of the Dow is now at 0%, but the price of the Dow continues to increase. This is odd because in each of the prior asset bubbles, earnings growth accompanied price appreciation, but in the current bubble, growth rates have been falling steadily and could even fall more.
According to my macroeconomic work, The Investment Rate, which has never been wrong about predicting major economic cycles, we are in the third major down period in U.S. history and it does not end until 2023, so the increases we are witness to today are happening in the face of not only no growth in the Dow, but also in the face of an underlying very weak economy.
We are certainly in an asset bubble, and eventually all bubbles end badly, but currently there is no end in sight. The music will stop however, we all know this will happen because it has happened after every other asset bubble too, and when it does, wealth destruction will happen again too, but for now the Markets are breaking out and no one cares. They do not care about the underlying economy, the no-growth in the Dow, and they are only concerned with higher market levels, which seem to happen every day. All we need to do is be aware, stay aware, and be ready, but at this point we cannot fight it.
When the music stops, it will be ugly, which is why we focus on proactive strategies that manage risk, but the music has not stopped yet. One might argue that it could stop at any time, but the market can increase longer than we could fight it, so instead of fighting it, we should just remain proactive and manage risk with discipline and structure as we have done since 2000, when Stock Traders Daily was found. By staying proactive, we will be nimble enough to help us avoid the wealth destruction that eventually will come.