Only the convoluted circular reasoning of Wall Street would cause stocks to go up after US GDP was reduced from nearly 3% to barely 2%. The perverse rationale is that since growth is stunted, the Fed will keep interest rates low for the foreseeable future. Low interest rates correlate with inexpensive operating costs and therefore better corporate earnings. This balance sheet game that has been played and replayed for six years, it’s getting old.
Our anemic economy has been limping along at subpar growth since the Great Recession. 2014 was supposedly the year that growth would top 3-4%. With half the year over, both the Fed and World Bank have drastically reduced their estimates on GDP growth.
This is at the same time that inflation topped 2% in May, wholesale prices are up everywhere. Troubles in Iraq and Russia/Ukraine have oil at over $106/barrel. Food prices are at all-time highs. Beef and pork are suffering from drought and disease. Even with cheap abundant natural gas to replace coal, electricity rates are also at all-time highs.
While corporate earnings may get a boost from continuing low interest rates, they may not be able to pass along higher input costs to debt strapped consumers. Time will tell, second quarter earnings will be announced in July.
Currently the market is FAIRLY priced (~17 PE), assuming corporate profits meet expectations. If earnings come in under 5%, perhaps we’ll finally see a long overdue pullback.
Invest with caution.