A V-Shaped Recovery with 4-8% GDP Growth?

I've written about macro headwinds for the stock market before. Recently David Rosenberg, former chief economist at Merrill Lynch, now chief economist at Gluskin Sheff, indicated that the stock market is pricing 4.25% GDP growth:

Based on past linkages between earnings trends and the pace of economic activity, believe it or not, the S&P 500 is now de facto discounting a 4¼% real GDP growth rate for the coming year. That is what we would call a V-shaped recovery.

Raising the GDP growth stakes
Over at Hussman Funds, William Hester wrote an article entitled Earnings Growth Forecasts May Require a Robust Economic Recovery, which may have raised the stakes on Rosenberg's analysis.

Hester analyzed the relationship between implied earnings growth and nominal GDP growth, shown in his chart below. (Note: I have annotated the chart to interpolate a nominal GDP growth of about 10% and the 10% interpretation is strictly my own.) If we assume an inflation rate of around 2% and look at the interpolated nominal GDP growth of 10%, it suggests that the market is discounting real GDP growth of about 8%. [click to enlarge]


Is 4-8% real GDP growth realistic? It would be quite a V-shaped recovery.

Deteriorating technical conditions
Meanwhile, Barry Ritholz at The Big Picture wrote that the market is rallying on lower volume and deteriorating breadth:

Ron Griess of The Chart Store points to the rally continuing on decreasing volume. I would also note that breadth is softening as well.

An exuberant and over-the-top-giddy equity market derived macro outlook and deteriorating market technicals isn't exactly encouraging for bulls.

Don’t say that you weren’t warned.

Comments

[chap08:]

No, we wont get 4-8% GDP growth, but it is meaningless to value the stock market based on one year's GDP or earnings. Remember that ownership of the S&P 500 is part ownership of the profits of corporate America in perpetuity.

Aug 12 08:09 AM

[TonyNasir:]

Investors behind the current rally must be dreaming. They are just defying the common sense with the false belief that somehow the consumers would open their wallets in spite of worsening job market conditions. Technically speaking, $SPX has formed a bearish rising wedge starting from the March lows, which (when broken) would imply a visit to March lows at a minimum.

Aug 12 08:15 AM

[Davewmart:]

Bob Prechter is equally, or more, pessimistic:
finance.yahoo.com/tech...=^DJI,^GSPC,SPY,DIA,QQ...
We are tracking the 1930 bear market rally in his opinion, and are likely to have at least as great a plunge.
Other points of note in his analysis are weak commodities including gold and silver and a strong dollar.

Aug 12 08:19 AM

[nova:]

The major differences between the today world financial markets and 1930s are gigantic markets manipulations by central banks and governments.

These mountains of printed money must go somewhere. The most probable places are commodities and equities. Just look at China.

Aug 12 08:42 AM

[Nick36:]

Not every investor has the same time horizon. If it's only short-term traders who are bidding up stock prices now. Then they might be pricing in a GDP bounce in the next quarter and nothing more than that.

According to latest data, the average holding time for stocks is now 6 months. Which means that there are a lot of short-term traders in this market. And 50% of them have time horizons shorter than 6 months.

Perhaps a lot of short-term traders know that this is just a bear market rally. But they don't care that the stock market might go down a lot next year. Because they plan to be out of the market long before next year arrives.

Aug 12 10:01 AM

[Earthizen:]

It's articles like this that make me fear the rally will keep going, notwithstanding the Goldman Sachs' S&P500 target of 1050 by yearend. As long as people, and a large number of people, stay on the sideline and pooh-pooh this rally, the market makers of the world will push the rally higher so more people will be suckered into the recovery story. S&P 1100, 1200, here we come before more sideline observers are convinced that the rally is for real.

Aug 12 10:26 AM

[Nick36:]

I don't think it's possible to persuade long-term investors who look at P/E ratios of companies that this rally is for real. Because the higher stock prices go, the less realistic these prices look to those who consider the P/E ratios.

Only short-term traders who use technical indicators and momentum to do their trading can be persuaded like this. And by the looks of it, they don't need any more persuasion. They are already persuaded.

Perhaps that's the difference between a bear market rally and a real bull market. In a bear market rally only short-term traders bid up prices, while long-term investors stay out. Whereas in a real bull market, the long-term investors buy the market too. And they provide support for the market by hoarding shares and reducing the number of available shares in the open market.


On Aug 12 10:26 AM Earthizen wrote:

> It's articles like this that make me fear the rally will keep going,
> notwithstanding the Goldman Sachs' S&P500 target of 1050 by yearend.
> As long as people, and a large number of people, stay on the sideline
> and pooh-pooh this rally, the market makers of the world will push
> the rally higher so more people will be suckered into the recovery
> story. S&P 1100, 1200, here we come before more sideline observers
> are convinced that the rally is for real.

Aug 12 10:35 AM

[On Going Co...:]

can anyone open that rosenberg article?

Aug 12 11:28 AM

[CautiousInv...:]

Analysts, who are not accountable and who can revise their estimates as quickly as writing an email, are not troubles by such by internal consistencies as matching growth in corporate profits to growth in domestic output.

Most economists are looking at 2% growth over the next two or three quarters. For the forseeable future, the consumer will be a drag on economic growth as the household saves and liquidates debt.

Aug 12 12:19 PM

[Mark Bern:]

I think that a sustained growth rate of even 2% over the next 12 months is very optimistic. The economic ship is dragging too many achors to achieve any real momentum: excessive debt, rising unemployment (no matter how BLS reports/spins it there are still more people without jobs now than three month earlier), lack of capex by businesses (due to excess capacity), consumers are hunkered down, credit contraction, dropping housing prices, bankrupt states, etc.

And the solutions proposed thus far by government have create zero permanent jobs. Everything is temporary and wil end within months. There will be other temporary jobs created by the stimulus spending, but they will act as a means of recycling back into the economy those who are ending other temporary assignments. We need to build permanent solutions for long term growth and stability. These bandaids, like Cash for Clunkers, will fall off before the wounds are healed and the government will just find more bandaids.

Aug 12 12:49 PM

[John Lounsbury:]

It opened for me.


On Aug 12 11:28 AM On Going Concern wrote:

> can anyone open that rosenberg article?

Aug 12 01:43 PM

[The Simple ...:]

Using S&P's 2010 EPS estimate of $37.26, and applying the current P/E ratio of 25, would put the SPX around 938, a 10.6% drop from Goldman's target number. Either earnings would have to give us a considerable positive surprise, or investors would have to bid up valuations quite a bit more. It's hard to make a good case for further equity upside based on the fundamentals.


On Aug 12 10:26 AM Earthizen wrote:

> It's articles like this that make me fear the rally will keep going,
> notwithstanding the Goldman Sachs' S&P500 target of 1050 by yearend.
> As long as people, and a large number of people, stay on the sideline
> and pooh-pooh this rally, the market makers of the world will push
> the rally higher so more people will be suckered into the recovery
> story. S&P 1100, 1200, here we come before more sideline observers
> are convinced that the rally is for real.

Aug 12 02:59 PM

[Old Trader:]

I have to agree with Nick36 in regards to the short term thinking of many currently in the market. I recently met a guy, and we started discussing the market/investing. He told me that his definition of "long term" was 6 months. Fwiw, my "definitions" are short term = up to 12 months, intermediate = 1-3 years, long term = 3-5 years. My "trades" may be as quick as a few weeks, roundtrip, if either my price target is hit, or I get stopped out, but I know going in that its a short term thing and separate from my core portfolio.

Aug 12 08:39 PM

[untrusting ...:]

Would not be surprised if your friends definition of LT=6 months might not be a lot more common these days for a lot more "investors".


On Aug 12 08:39 PM Old Trader wrote:

> I have to agree with Nick36 in regards to the short term thinking
> of many currently in the market. I recently met a guy, and we started
> discussing the market/investing. He told me that his definition of
> "long term" was 6 months. Fwiw, my "definitions" are short term =
> up to 12 months, intermediate = 1-3 years, long term = 3-5 years.
> My "trades" may be as quick as a few weeks, roundtrip, if either
> my price target is hit, or I get stopped out, but I know going in
> that its a short term thing and separate from my core portfolio.

Aug 13 12:15 AM