Stock Market/Economy: Conflicting Signals

(Drivebycuriosity) - If we believe the stock market then the US economy is getting worse. Stocks fell 5% year-to-date and some days ago they hovered about 14% below last year`s peak. Commentators claim that the stock market´s drop signals a coming recession. But the news from the economic frontier sends a quite contrary message.

Yesterday we learned that in the US personal income and spending (consumption expenditures) both grew 0.5% in January (calculate). Personal spending and disposable personal income are again growing at 4%-plus rates in annual terms—the best gains in about a year (capitalspectator). Private-sector wage growth popped even more, posting a 4.9% increase in January vs. the year-earlier level—the strongest annual gain since last August (capitalspectator).

So, US consumers are earning more and they are spending more - and both trends are accelerating (charts below tradingeconomics). Other fundamental data also got stronger in January, including industrial production and durable goods orders (driveby reuters). The unemployment dropped to 4.90% and the weekly jobless claims hover close to a 40-years low.

So, stock market and fundamental data give conflicting signals. Who is wrong? I bet that the stock market gives wrong signals. This reminds me of a quote from the late Prof. Samuelson (driveby). He joked: “The stock market has predicted nine of the last five recessions”. The economist and nobel prize winner was right, double-digit losses and even bear markets (a drop of at least 20%) happened often without an economic downturn. For instance the infamous "Black Monday" crash from October 1987 wasn`t followed by a recession. The US economy grew in 1987 3.5% and accelerated to 4.2% in 1988.

This year`s drop shows how random and irrational the market sometimes behaves. The losses were caused by the gloomy sentiment and aggressive herding behavior. Hedge funds and other speculators typically buy and sell the same stocks, at the same time, and track each other's investment strategies. In the recent weeks traders - including the timid managers of huge funds and other portfolios - dumped  anything which seemed risky, their sales caused others to sell too, which lead to a snowball effect of more and more selling.

It seems that the stock market is obsessed with tumbling oil prices and the losses the banks - who  financed the US oil producers (frackers) - are suffering. The market neglects that the general economy - everybody is a consumer - is benefitting from cheaper gasoline, lower heating costs and reduced costs for transportation & materials.

The recent stock market losses remind of the year 2011 when a gloomy sentiment send stock prices deep south. I assume that the positive news flow from the economic frontier will continue - thanks to cheap energy & materials and technological progress - and will rekindle the stock market rally as they did in the year 2012.