The Market Forgot to Read the Script
July 04, 2004
Two down…and what now? The big, bad June 30th date has come and gone. So far, the market has responded as if it forgot to read the script that all the pundits were writing. After the Iraqi transfer and the end of suspense over rising rates, we were supposed to be "all systems go" for a nice summer rally. Instead, the stock market generally ended lower for the week and has begun the second-half of the year ominously lower. A seeming FLOOD of earnings warnings from tech companies, poor sales reports from GM and Ford, and equally destructive analyst downgrades in such big names like Intel provided additional excuses for the sellers to unleash their fury on the market. However, just as the market initially rallied off the early transition of power in Iraq and then sold off, I suspect that the sell-off post-Fed will be followed by a rally of some sorts. The market tends not to behave as expected when almost everyone expects the same thing: everyone has already made their moves prior to the event, so when the event comes to pass there are few players remaining at the ready to complete the script. Again, I cannot imagine the market getting much further than we are now. If by some combo of blood, sweat, and tears we actually retest the year's highs, any new highs will serve as another one of those excellent selling opportunities for the year.
How can I be so skeptical? I continue to note how estimates for earnings growth generally demonstrate expectations for slower growth. The prospects of higher rates, slower growth, and moderate to high valuations make for one lethal combination for stock prices. Economic reports this week sent out an important warning sign. Of particular note was the June jobs report that came in under 50% of the consensus expectations. Granted, economists have rarely gotten the jobs numbers correct ever since they expected more jobs growth a year into the Fed rate-cutting cycle, but it speaks volumes when pundits and analysts roll out all the typical excuses for getting this one so wrong again. I wonder why they even bother. It seems more credible to predict jobs growth over a year, maybe even a quarter, but this monthly game of trying to pinpoint where mercurial Mr. Job Growth will land this time seems pretty silly to me. Unfortunately, attempts to look at the bigger picture can also fall flat on its face. Bushie attempted to put a smile on June's job numbers by stating: "The jobs increased by 112,000 in June, which means we've had a total of 1.5 million new jobs since last August. To me, that shows the steady growth." ("U.S. Job Growth for June Shows Steep Slowdown" - NY Times, July 3, 2004). Unfortunately, as it turns out, the economy needs to create 150,000 new jobs per month to keep up with the growth in the labor force. Bushie's proud accomplishment represents 136,000 jobs per month since August. Instead of steady growth, we have at best a stalemate. Of course, Bushie is no mathematician, so he can be excused for stretching the truth yet again. And I am sure the spinmeisters he has working his economic mumbo jumbo figured that few people will take the time to really take apart the President's claims. So, the economic recovery remains a jobless recovery. Even better, we can look forward to an inflation rate that has probably stopped going down, continued stagnation in wage growth (this June report showed wages growing slower than the rate of inflation), the end of fiscal and monetary crutches to keep the economy limping along, and mountains upon mountains of debt at the consumer and government levels. We should not fear a crash around the corner, but we also cannot expect the return of boom times under these conditions. In fact, when you put two and two together, it is no wonder that arguments claiming the slow and steady decline of Americans' standard of living sound more and more convincing (for example, see the hub-bub surrounding Harvard Law Professor Elizabeth Warren's book "The Two-Income Trap: Why Middle Class Mothers and Fathers Are Going Broke." I have yet to read it, but it is on my list!)
So far this year, the market has done its best to hide its true intentions. The bears see the writing on the wall and wonder why the cyclical bull market still has not come to a cataclysmic end. The bulls continue to see the glass as half full and eagerly await vindication that THIS TIME the most recent rally is for real. If the market has read either script, it sure seems to have forgotten its lines.