Why Are Markets Ignoring The Obvious U.S. Slow Down As If It's Nothing?

The Business Insider ^ | 8-3-2010 | Vincent Fernando, CFA

[blam]

Why Are Markets Ignoring The Obvious U.S. Slow Down As If It's Nothing?

Vincent Fernando, CFA
Aug. 3, 2010, 1:24 PM

The U.S. economy has clearly slowed from its earlier 5.6% clip in Q4 2009. GDP growth for the second quarter of 2010 was reported last at 2.4%. Why haven't markets tanked? Aren't we also seeing many growth indicators easing back? Isn't the slow-down obvious?

If you haven't had these concerns, the FT's Econoclast at least has:

Today’s US personal spending and income figures for June suggest that the underlying growth of real consumer spending has slowed to around 1.5 per cent per annum, which is consistent with the sluggish GDP growth rate suggested by yesterday’s ISM survey. Yet global equities have recently eliminated the losses which they suffered when the European debt crisis was at its peak in April and May, and equities are now slightly up on the year.

What is going on?

...

So the markets appear to be taking the view that other countries are able to withstand the slowdown in the US, and if all else fails, then the Chinese government and the Federal Reserve will come to the rescue. Surely they are not just whistling in the dark - are they?

That's one interpretation -- blame the plunge protection team for rallies or lack of a crash.

Another interpretation of the market's apparent complacency is that the economic slow-down we're seeing now was already expected. Even at the beginning fo 2010, few expected U.S. GDP growth to maintain its late 2009 rate of expansion.

As Barron's summed up nicely this weekend:

The slowdown in GDP growth, to an annual rate of 2.4% in second quarter 2010, tells us nothing decisive about prospects for the second half.

[snip]

[cvq3842]

Maybe the businesses that have slashed payrolls by laying off many workers aren’t doing that poorly. but sooner or later they need people to buy the products.

[fightinJAG]

No. It's because at this point in history the real economy in the U.S. is "nothing" -- i.e., is largely irrelevant -- to the factors that drive the U.S. stock market.

Almost all corporations that showed good earnings last quarter -- and which, therefore, made the DJIA rise -- showed good earnings on overseas sales and operations.

If Caterpillar's plant and sales is going gangbusters in China, what happens in the U.S. real economy is not relevant to how much money Caterpillar makes and what it's stock goes for.

[goldendays]

all because the government sent America JOBS over seas to china Listen to these men, they were telling you the truth.
http://video.google.com/videoplay?docid=1590858026591557284#

[fightinJAG]

The stock market is based on what corporate stock is worth to buyers on any given day. What stock is worth depends on corporate profit. Corporate profit these days comes mainly from overseas — meaning it is not dependent upon the U.S. economy at all.

So the reason the U.S. markets sometimes shrug off what is happening in the U.S. economy is that what is happening in the U.S. economy is only a tiny piece of the puzzle as to how corporations make money and how much they make.

[goldendays]

Caterpillar’s has to sign contract to give 51% to China.

[fightinJAG]

I don’t agree that corporations are necessarily “not replacing workers.” They may not be replacing U.S. workers. But what I see happening is corporations hiring lots more workers overseas because that’s how they can maximize profits.

So the corporation makes more profit — thus possibly increasing its stock prices — but it adds exactly zero jobs directly to the U.S. economy.

As for the fear, which is not wrong, that corporations will start precipitously spending the piles of cash they are sitting on, I think here too what we’re seeing about the true globalization of these companies will come into play.

Why are coroporations sitting on cash? Mostly become of Obama and the huge amount of uncertainty and animousity his administration has added to a very fragile U.S. economy. IOW, this money is insurance against The Next Stupid Thing President Obama Might Do.

If and when the threat of stupid Obama-isms clears up, and corporations feel more free to let some of the cash out of the bag, they won’t necessarily start spending it in the U.S. In fact, they probably won’t spend much of it here directly! Why would they? Their profitable divisions and operations are overseas.

So once the need to self-insure passes, there will be a whole, literal WORLD in which corporations can start to parcel out this money. Yes, it could still become a money dump that results in hyperinflation. However, given the size of the pool into which the corporations can throw these “pennies,” hyperinflation may be much less likely than when a bunch of U.S. corporations, all with major operations mainly in the U.S., start spending to ramp up only U.S. operations.

[Pining_4_TX]

Today on Varney & Co., they said the market is up because people and businesses are trying to realize as much income as possible this year due to the tax hammer that is coming down next year. Art Laffer said that profits may look good right now, but the whole economy will tank in 2011.

Forbes Magazine offered the same advice - take income now, and defer deductions until next year. We will be in for a real slowdown then.

[blam]

That makes more sense than anything else I’ve heard/read. Thanks.

[Pining_4_TX]

You’re welcome. :-)

I am fascinated by economics and business, even though I don’t understand most of it.

[stevio]

Same reason that gas was mysteriously $4+ @ gallon just sixty days out of the election.

So blatant that the sheeple can't see it.

[aruanan]

So blatant that the sheeple can't see it.

I see the sheeple-users are starting to infiltrate FR again.