There are no positive fundamentals driving the U.S. stock market. No one has ever gotten rich by chasing markets by buying at the top, which is how this market feels, but it seems everybody feels they cant afford to miss being in the U.S. equity markets.
Investors (and advisors) should be focused on the true facts of the U.S. economy and corporations and tune out the hype and happy talk from the media and Fed heads. Instead investors should focus on the real data. I see five warning signs that the arrival of Spring has brought deterioration in the economic data which tells me U.S. stocks are going to first start to trip and then tumble.
1. A lot of overextended buyers in U.S. stock market.
There is a shortage of buyers in Apple stock, which is down 40% from its high. In fact, there is a very large position of short sellers. Its hard to imagine because Apple stock is the number one capitalized company in America. It has the best marketing and brand a company can have, but the short positions in this stock are telling another story. The tale is that there will be a shortage of upside because the economy is breaking down and cant support what Apple needs. The broader U.S. stock market is showing similar strain. According to a report released from Kimble Charting Solutions, for the month of March of 2013 available cash in investors accounts was actually approaching its least levels that they have seen EVER! This suggests there is a scarcity of buyers, but its an even more ominous sign because low cash levels preceded both the 2000 and 2008 market collapses, and the 2011 mid-year correction. This is one reason you dont want to be invested in the U.S. stock market now.
2. Market breadth is weak and market indices have been hitting new highs,
But sectors including energy, materials, transportation, retail and technology remain behind. These signals are not good. Even the Russell 2000 failed to rally, but broke down below the November trend line and the one-month trading range. This is not healthy for the stock market here and tends to signal downward momentum.
3. Weak corporate earnings.
Traditionally, a surging stock market is propelled by strong corporate earnings growth, but that is not the case today. Actual S&P500 operating earnings have declined 9% since the second quarter of 2012 peak. In the past 3 months, 117 companies have warned about Q1 earnings guidance shortfalls versus only 24 companies issuing positive guidance. Thats a negative 3.0% update for every one that is positive. Thats the highest negative ratio in the last 7 years. Furthermore, earnings forecasts turned even more bleak as more than 100 S&P 500 companies have offered negative revisions of their quarterly earnings forecasts, leading economists to expect first-quarter earnings growth to expand by just over 1.5% compared to 6.2% earnings growth during the fourth quarter of 2012. This is not good news for the U.S. stock market nor its investors. Fantasy will go away and reality will hit. The U.S. market engine is running on fumes right now and it will need gas really soon as the needle on the gas gauge is below empty.
4. U.S. consumer spending numbers are weak.
Supposedly strong consumer spending numbers reported by the U.S. government totally contradict what the private sector surveys and companies are reporting. U.S. government reported consumer spending increased by 70 basis points last month according to the Commerce Department. They have been exaggerating because Wal-Mart and McDonalds are reporting negative sales for the same time period. These stocks are bellwethers for the US economy. Consumer spending could not have increased. Even more proof is the March retail sales showed a 0.4% decrease, which was the most in nine months as employment slowed, further proof that U.S. households ended the first quarter of 2013 on softer footing. This is another negative indicator for the U.S. markets.
5. Jobs are non-existent
Although the U.S. government says the jobless rate fell from 7.7% to 7.6%, the sad truth is that nearly 500,000 Americans have dropped out of the labor force. We now have the smallest amount of people in the workforce in a generation. In fact, the initial jobless claims of 385,000, week ending March 30, are up from the previous weeks 357,000 and higher than expectations. Small-business produces half the private GDP and employs half the private-sector workforce. The fact that they are not growing, not hiring, not borrowing and not expanding like they should be, is evidence enough that uncertainty is slowing the economy. March non-farm payroll : 88,000 new jobs, missing expectations of 175,000-195,000 and far below Februarys 238,000. Labor-force participation declines to 63%, well below the 66% average of the last two decades. There are 11.7 million people unemployed, not including the 496,000 who dropped out of the civilian labor force in March. Thats not good news. We cant have a jobless recovery its just not possible. I dont think any of us have witnessed such a deliberate blatant attempt by the Federal Reserve and government reporting agencies to distort economic data and at the same time relentlessly pushing unsuspecting Americans into the stock market. When these market riggings fail, and they will, the change in the market forces will be swift and painful.
This is that moment to look at client portfolios and determine if you or your clients are invested in the U.S. stock market, whether you should get out or can you and your clients handle the change? If you are not in the market, dont feel like you missed out on the party, because you havent. This is a difficult thing to do, sit on the sidelines and have discipline not to chase a rising market, even as clients are pushing you to. This is the time that can make or break a portfolio. There are a lot of changes ahead in the U.S. market and economy, and its not going to be pretty.
Dawn Bennett is Co-Portfolio Manager of Bennett Funds and CEO and Founder of Bennett Group Financial Services