How Can Stocks Be So Good When the Economy's So… Not?

I really hate to be so negative, but I really don’t get the rally in stocks.

Just last week alone September retail sales disappointed, consumer inflation flat-lined and a couple major regional manufacturing surveys showed contraction. In other words, economic activity is actually shrinking. The Fed’s September index of industrial production showed another contraction, which was the fourth in five months.

I’m not cherry picking the bad economic reports here. I really can’t find many “green shoots” in the picture.

Our unemployment rate of only 5.1% seems to be positive, but wage growth has been absent. Home sales and auto sales have been strong, but a lot of this is a result of the Fed keeping borrowing costs so low. And those seem to be the only sectors holding up the entire U.S. economy!

Aside from the poor economic data, it’s also earnrnings season. Corporate earnrnings have been coming in a little better than expected, and that could be the reason stocks (S&P 500 and Dow Industrials) are only 5% away from all-time highs.

Of course, it’s not hard to beat expectations when they’ve already been revised down. Just this past Friday, General Electric posted better-than-expected earnrnings, but its revenues fell short. We’ve been seeing a lot of that lately.

Many companies have resorted to share buybacks and accounting mirages to boost or stabilize earnrnings per share. With the Fed’s zero interest rate policy this has been a cheap game to play.

So, stock prices continue to be buoyed by Fed policy and not by improving profitability or growing revenues. But when the music stops and companies run out of accounting gimmicks, look out below!

Why am I so focused on stocks? Because when the shoe drops and stocks finally correct, the money will naturally flow into the safety of U.S. Treasury bonds.

In fact, bond investors are already starting to position for a major slow down. See the chart from last week, which shows a strong technical patternrn supporting future lower yields.

30 Year US Treasury Bond Oct 20

Lance Gaitan

Editor, Dent Digest Trader

Lance Gaitan

Lance has a unique ability to find big gains in the most boring of market. He manages to turn sleeping giants into a monster gain-makers – some of the most profitable investment opportunities of a lifetime.