Macro Picture Distances from Equity Exuberance

Market Trends - 24/04/2015

On the surface, major leading indicators of the United States economy point to continued expansion despite the Federal Reserve ending its quantitative easing program and looking forward towards raising interest rates.  However, a deeper look at the data shows that the economy is not out of the woods and that hiking interest rates could be detrimental to growth despite the multitudinous promises from Federal Reserve voting members.  Inflation data released earlier in the week showed that annualized inflation slipped back into negative territory double-dipping after managing to rise back to unchanged in February.  To say the US economy is struggling is a substantial understatement especially with export growth slowing and imports tumbling with the drop in the new orders component of the latest Manufacturing PMI showing steady corrosion.  While stock markets continue to show the vast prowess of the US economy relative to peers, the underlying fundamentals do not necessarily corroborate this line of thought.


Equity benchmarks hit new highs over the week, with the S&P 500 and Nasdaq Composite indices closing at new records.  Although this is an important indicator for Federal Reserve economists keen on maintaining the Fed’s credibility in the face of a rising rate environment, manufacturing and housing data continues to disagree with this policy course.  The dollar is not buying it either as evidenced by the dollar losses on the week.  Housing optimists cheered on Wednesday’s existing home sales number, only to be severely disappointed by the last new home sales figures released yesterday.  The wide disconnect between data and equity exuberance has left Wall Street unmoved in the position that the secular bull market in equities is still in its early phase.  However, a hard look at the data seems to disagree with this prevailing sentiment and GDP data due next week is likely to confirm that very point.  Although equities are largely a measure of future expectations, the crumbling real economy is not likely to provide the confidence for major benchmarks to keep closing at new records for the long-term. 


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