David Rosenberg: Investors and economists are playing with fire
No matter how you slice and dice it, one thing is clear: the reflexive stock market rally that began last October (and ended this past August) never had much in the way of fundamental underpinnings. Momentum, yes. Technical picture, yes. Sentiment and emotion, yes. Fundamentals and valuations, sorry, no. And this is why we never bit despite all the external pressure to do so. Everyone loves a bullish narrative.
Meanwhile, the Conference Board’s leading economic index has fallen for 17 consecutive months as economic uncertainty continues to grow, and the ISM manufacturing purchasing managers’ index (PMI) has been in contraction (sub-50 print) mode for 10 straight months and has been in decay since March 2021. Delinquency rates on credit card loans have soared to 11-year highs, and to the early 2020 peak for auto and related credit. Germany is on the precipice of a recession, Japan is seeing contracting domestic demand and China is in the throes of a debt-default and asset-deflation cycle — cyclical negatives bumping against a secular slowdown.
And we have a United States Federal Reserve with a complacent view on the U.S. economic outlook and an obsession with its inflation target of two per cent, which has sent the Treasury curve to the highest level since just before the onset of the late-2007 Great Recession.
Meanwhile, the average of nominal gross domestic product and gross domestic income growth in the U.S. has been wound down to just around 4.5 per cent from 10.1 per cent a year ago — this is characterized as “solid” by the central bank. The historical norm is much closer to seven per cent at an annual rate. At around 4.5 per cent presently, the trend is back to where it was in the first quarter of 2021 when the S&P
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