US history shows that rare are the times when the economy fails to respond positively to
monetary stimulus. And that is a good thing now, because the economy has lost enough
progress momentum to be concerned. The weekly leading indicators are pointing mildly
and fitfully upward as are the measures of real personal income. But, measured yr/yr,
industrial output growth and real retail sales growth, although positive, are low enough to
warrant pause. Similar can be said for my top down profits indicators such as the $value
of industrial output and the recent PMI reports. Here we see that growth momentum has
slowed to levels consistent with the development of profit margin pressures on top of the
low physical output growth.
The Fed's new QE 3 is substantial enough to support a significant re-acceleration of output
growth as well as an eventual fresh bounce in the "headline" inflation rate. But, the transition
from a sputtering economy to one which progresses smoothly can take a couple of months
depending particularly on consumer and business confidence. (The relative flattening of
production in 2012 suggests companies are already well mindful of maintaining inventory
The stock market can move up during periods of this sort as long as investors remain
confident that monetary easing will work and even if profits level off for a brief period of
time. The positive bias to the market can also remain in place even if profits begin to lag a
recovery of volume growth because of lingering pressure on margins.
What is not clear is what will happen if business ratchets down further in the interim instead
of just gracefully leveling for a relatively brief period. Such could occur if the economy's
dynamics turn out weaker than the Fed expected and the further monetary easing comes too
late to save the day. There may be just enough forward momentum in the economy to moot
the former case, but rest assured that investors and traders will now be looking for good
news and not the negative news that prompted the Fed to ease. Bad news is no longer
"good news" but plain old bad news instead.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!