Has the Stock Market Decoupled from the Economy?
By Ron DeLegge
August 2, 2010
SAN DIEGO (ETFguide.com) – The economy has never looked worse. And yet, the stock market is coming off its best month of performance so far this year. What’s going on?
The growing disconnect between the economy’s poor performance and a rising stock market is evident. How long will it continue? And has it ever happened in the past?
Gross Data Reporting
Let’s look at gross domestic product or GDP, a widely used barometer of economic output. It’s supposed to measure the market value of all goods and services produced by a country. Even though many economists and Wall Street analysts use GDP in their forecasting models, the believability and trustworthiness of GDP figures is doubtful.
The July issue of the ETF Profit Strategy newsletter said, “The GDP vandalizes basic accounting principles by treating the depletion of natural capital as income instead of the depreciation of an asset.”
In a 1992 report to the Council on Environmental Quality, the Bush Administration admitted, “Accounting systems used to estimate GDP do not reflect depletion or degradation of the natural resources used to produce goods and services.” So as the U.S. depletes its oil wells, its forests and other natural resources, GDP rises!
Another example of GDP hanky panky is 2008 when stocks (NYSEArca: VTI) suffered a 37% loss and the U.S. experienced its worst economic downturn since the 1930s.
According the Bureau of Economic Analysis, the economy was great in 2008! GDP was originally reported as an increase of almost 3%. Even though the stock market was bad - really bad - GDP told us that economic activity was strong and bound to get better.
Then, a paranormal event took place; something we’ve seen over and over and over again: GDP revisions. Yes, the government’s statistical robots decided the original 2008 GDP figures weren’t correct. As a result, 2008 GDP was revised downward to just a 0.4% gain and then, when no one was looking, one more time to its present level of zero percent.
In its latest analysis, the government now says 2Q 2010 GDP increased by 2.4%. Break out the champagne! And while you’re celebrating, just remember the second quarter was when government stimulus spending peaked. Here’s the translation: Expect less of a contribution from government spending to future GDP and economic reports.
Psst….Want to buy a house?
More decoupling between real economic activity and stocks can be seen in the depressed housing market.
Over the past year, homebuilding stocks (NYSEArca: XHB) are up 6.30% and mortgage REITs (NYSEArca: REM) are ahead by 14%, yet sales of new and existing homes are at depressed levels. Other than a late spring sales surge due to an expiring tax credit, the housing market is bad and getting worse. Despite the lowest fixed mortgage rates in fifty years, it’s barely making a dent.
A Credit Suisse survey of real estate agents nationwide showed foot traffic at homes for sale during the month of July was at lowest levels since the firm started keeping tabs on it in 2005.
History…that boring thing
Decoupling of economic activity and the stock market’s performance is not without historical precedence. After evaporating nearly 90% in stock market value by 1932, stocks as measured by the Dow Jones Industrial Average (NYSEArca: DIA) subsequently rose 50%. What did that 50% rise mean?
Had the economy suddenly improved? Was the worst over? How many GDP revisions later were needed to learn of the real situation?
As history shows, the economy and the stock market aren’t always in synch with each other. From that angle, today’s decoupling between the two shouldn’t be surprising even though it remains a perplexing phenomenon. (Talk of a behind the scenes Plunge Protection Team (PPT) are certainly warranted, and if not, then they provide wonderful evening conversation.)
Nevertheless, somewhere down the road the economy and stock market will eventually meet. They did during the Great Depression and they did during other periods.
Or is this time different?!