US stock markets hit record but real economy remains slow

Index Aug13“Don’t fight the Fed” is one of the oldest rules in stock market investment.  And it has proved valid again, as this month’s IeC Boom/Gloom Index shows:

  • The Fed and other G7 central banks have poured $10tn of stimulus into financial markets since 2008
  • This cash has finally taken the S&P 500 (red line) into record territory
  • Critical to this move has been the Fed’s $800bn QE3 stimulus spend since September
  • But sentiment as recorded by the Boom/Gloom Index has remained relatively subdued (blue column)
  • It is nowhere near previous peaks

The key issue is whether the Fed’s policy of boosting financial markets will ever achieve its goal of boosting consumer confidence and restoring economic growth.  It is now 5 years since the policy began, and so far the evidence is not enccouraging.  US investment magazine Barron’s thus reports the findings of MacroMavens analyst Stephanie Pomboy:

“Corporations are rich with cash, but it is mostly in the hands of the biggest companies. As rates jumped recently, the pace of monthly credit issuance shriveled to $58 billion from $260 billion. Here’s how much companies have relied on financial engineering and buybacks to placate shareholders: Per-share profits are 10.6% higher than the precrisis peak, but net income is up just 3.3%.

“Between January and the start of the tapering talk in late May,  the stock market added $2.8 trillion in market value. But the size of the U.S. economy expanded just $500 billion, Pomboy notes. Credit issuance during this stretch totaled—guess what?—almost exactly $2.3 trillion. “If growth—actual and borrowed—dictate where stocks are headed, then the quartering of issuance in the last six weeks portends ugly stuff ahead,” Pomboy says.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.