The real economy heads south, the stock market heads north. It’s hard to believe this is been going on now for at least two years. From Wolf Richter at wolfstreet.com:
“Everything feels distorted and unnatural”: Citigroup
On Monday, the S&P 500 index edged down 1.2 points. Over the last three trading days, the &P 500 has moved in a 12-point range, from 2175 to 2187. The index is now down a practically invisible 0.34% from its record close on August 15. Over the past 30 trading days, it had only five daily moves, up or down, of more than 0.5%, according to The Wall Street Journal, “equaling the lowest since October 1995.”
And trading volume has fallen asleep – much more so than during the normal summer lull. Even the algos appear to have been turned off for maintenance. Jared Woodard, a strategist at BofA Merrill Lynch, summarized it this way:
“Last week and the week before, you had to make sure your machine was actually on because it was flashing so infrequently.”
And no one is worried about anything.
The Chicago Board Options Exchange SPX Volatility Index (VIX) – the vaunted “fear index” – spent much of the past two weeks below 12, only a smidgen above the record low of July 2014.
In other words, nothing moves. But something has been moving: Earnings. The wrong way.
All-out financial engineering, record share buybacks, questionable accounting methods, such as those used by Valeant, and other tricks and devices [“The bezzle shrinks”: LendingClub, Theranos, Breitling Energy], have just one purpose: Drive up earnings, or at least “adjusted” ex-bad-items earnings per share that Wall Street likes to proffer, and that investors gobble up, eyes tightly closed, in a form of Consensual Hallucination.
But even those expertly doctored “adjusted” earnings per share of the S&P 500 companies have declined (on a trailing 12 months basis), according to FactSet, since their peak in November 2014 – for nearly two years, even as stocks have chased after new highs (red marks and text added):
Note the open-jaws syndrome between falling doctored “adjusted” earnings per share and rising stock prices. These two normally correlate. But no longer. They’ve been going into opposite directions for two years.
And earnings aren’t about to turn around. According to FactSet, “adjusted” earnings per share for the S&P 500 declined 3.2% in the second quarter. For the third quarter, the consensus forecast – so the optimistic case – is a decline of another 2%.
Analysts adjust their forecasts down as the quarter progresses so that companies have a chance to exceed these lowered expectations. A month from now, analysts will likely forecast an even larger decline in earnings. And they’re already forecasting an earnings decline for the entire year.
John Lonski, Chief Economist at Moody’s Capital Markets Research, when he mused that “overvalued equities threaten credit outlook,” put it this way:
Of late, the market value of US common stock is setting new record highs, notwithstanding the likelihood of a second straight annual decline by 2016’s broadest measure of pretax operating profits. As derived from the Blue Chip consensus forecast of early August 2016, profits will not at least match 2014’s apex until 2018 on a calendar-year basis.
So the Blue Chip optimist soothsayers think that earnings might not go back to the level of two years ago until 2018. And even as they’re saying this, earnings are still heading south.
Yet stocks are hovering at all-time highs, on very thin volume, and no one sees any risks to speak of, and earnings – even those beautifully doctored and “adjusted” earnings – for sure don’t matter anymore.
To continue reading: “Mother of all Shorts” when Stocks Cave to Reality?
