U.S. and global economic data have begun to diverge so greatly in recent months -- with sustained weakness here and a surge of strength overseas -- that it's a wonder we're all on the same planet.
The differential is more than just a matter for academics to discuss at the faculty club, because investors large and small need to decide, pretty much immediately, which set of data to believe.
Those who believe that American consumers, banks and factories are still the main engine of growth in the world are taking profits on recent gains in stocks, shying away from risk and husbanding cash. Those who believe instead that rising consumption and industrial might in Asia and South America are more important are going in the opposite direction, diving into risk with abandon.
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We'll know who's right in the fullness of time, but in the near term, investors do not have the luxury of waiting. They must anticipate the future based on limited data, act now, and prepare to face the consequences if they're wrong. That makes this summer one of the most intense stretches of soul-searching for professionals in the past two years, as it will make and break careers, reputations and fortunes for years to come.
In a moment I'll tell you why data and psychology now favor bulls, but let's look at the story from the perspective of active practitioners rather than economists -- two private wealth managers who actually have to make decisions on behalf of clients, rather than just spout off with no consequences.
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Worries and economic warts
Eric Sprott, a veteran fund manager and researcher based in Toronto, believes the buyers are in la-la land when it comes to interpreting economic data emanating from the world's largest economy. A few of his salient points include:- A prolonged U.S. retail sales slump, highlighted by a same-store sales plunge of 32% last month at Abercrombie & Fitch (ANF, news, msgs), shows that consumers are in no mood to buy goods even if factories were ready to make them. A plunge of 5.1% reported by U.S. shopping malls in June was worse than the dire 4.5% forecast.
- Unemployment is not just the worst since 1983 -- 29% of the unemployed have been looking for work more than six months; the number of people taking unemployment benefits has reached a record 6.88 million; and six people are looking for work for every job opening, a fourfold increase from just a year ago.
- With consumers on the sidelines, U.S. industry is on the brink. Factories used only 68.3% of available capacity in May 2009. The lowest prior level since the Depression was 70.9% in December 1982.
- Despite the recent uptick in construction, new-home sales are down 73% from their 2005 high, and the cumulative loading of rail cars is down 19.2% from 2008's depressed levels.
- Price/earnings multiples on U.S. stocks, reflecting investor sentiment, fell only to a multidecade average at 16 rather than to the single-digit lows seen in prior deep recessions.
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Bulls vs. bearsPros in the industry weigh in on how they view the markets, with David Tice, Prudent Bear Fund; James Paulsen, Wells Capital Management; Steven Stahler, Stahler Investment Group; Tom Lydon, Leftrends.com; and CNBC's Rick Santelli.
Sprott concludes by listing three scenarios for his clients: If S&P 500 earnings stay constant at $63.03 and price-to-earnings multiples hit cycle lows at 6 due to worsening sentiment, he sees the Standard & Poor's 500 Index ($INX) falling to 378. (It closed at 987 on Thursday.) If earnings are halved, as they have done three times in the past 30 years, and the P/E stays constant at 16, the S&P 500 would fall to 506. If earnings are halved and the P/E hits cycle lows, he gets an S&P 500 value of 189 -- a true, old-school depression.
Sprott says only buoyant investor sentiment is keeping the market up, as earnings have not improved. "Keep it simple, stupid," he says. "Investing is and always has been about the real economy, and this market is ignoring the hard data."
Continued: Globalization's other face
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