Economy: Down, Stockmarket: Up

The S&P jumped almost 3% last week, almost all of it on Wednesday and Thursday, even though there was no strongly bullish news.   Complacency rose back to levels almost as high as those last seen in April this year.  Volume was on the lighter side.

The real economy, on the other hand, showed signs of slowing down–again.  Housing is officially in a double-dip mode.  The largest asset class in America (far larger than the stock market) recorded a 0.7% price drop on the Case-Shiller 20 city index, when only a 0.3% drop was expected (September over August).   Per S&P which publishes the report, the results were very weak and disappointing.  Even worse, housing prices are expected to drop much more over the next six to twelve months.  ISM Manufacturing came in as expected; ISM Services were also as expected.  Chicago PMI was slightly better.  Initial jobless claims were much worse than expected–back up to the near 450,000 range that’s solidly in recession-level territory.  Factory orders fell even more than expected.   The biggest number of the week–and the ugliest–was the jobs number for November.  Nonfarm payrolls rose only 39,000, when 150,000 were expected.  This is the biggest miss in over two years.  The headline unemployment rate jumped to 9.8%, and not because folks re-entered the labor force (that would be a good reason for the rate to rise).  Average hourly earnings were unchanged; they were projected to rise. 

Technically, the stock markets are defying gravity, much like they did in April of this year and in the fall of 2007, when they continued to rise in the face of negative fundamental headwinds.  The negative divergences on the daily charts are still strongly evident–just as they were in the fall of 2007 and April this year.  The equity markets are overbought, yet the continue to levitate partly on the basis that NO news is bad for stocks:  if good economic news comes out (which isn’t happening) then stocks should rise; if poor economic news comes out (which is happening), then stocks should rise because the Fed will print more money (think QE3) and push stocks higher anyway.  In short, the pervasive feeling–reflected in the low VIX readings and the high bullish percentage readings–is that stock prices CANNOT go down.

So the question becomes, can this perception–rooted in hope and faith–be an actual foundation for rising and well-supported stock market prices?

Or is this just a re-run of a movie we’ve seen before?  A movie that ends in tragedy.

Alan Abelson, in this week’s Barron’s, offers a some evidence that it could be the latter.  He cites Paul Volcker, the outspoken former chairman of the Federal Reserve, who warned last week that we “in the most difficult economic circumstances of the post-World War II era and so is almost all the developed world.”

He continued with: “we are faced with broken financial markets, underperformance of our economy and a fractious political climate.” 

But somehow, the Wall Street salespeople, notes Abelson, managed to get the stock market to ignore the ugliness of the jobs picture and rally anyway.  Joblessness to soaring and already near 75 year highs.  Home prices, still almost 30% off-peak, are now falling again. 

But somehow, stock prices grind upward.  As Abelson notes, the markets are ignoring reality and ignoring the lessons of the past….

….at their peril.

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