Financial Fundamentals

Just Weak or Nonexistent? The incredible shrinking recovery of 2013

By Thomas K. Brueckner,
Strategic Asset Conservation

Depending on which experts you ask, the stock market is either about to suffer another precipitous decline a la 2007-2009—or continue a rally with no end in sight. Both sides have their math (more on that in a moment), but the bears increasingly have statistics, history, and facts on their side.

In early July, Americans learned that first quarter U.S. economic growth (GDP) was revised downward to 1.8 percent from the previously estimated 2.5 percent annual pace—a massive overestimation and a reduction to reality of nearly 30 percent. At the beginning of August, that Q1 number was revised down further—to a paltry 1.1 percent. This means that the original number wasn’t off by 30 percent—it was off by over 127 percent—more than double what actually occurred.

Not to be outdone by the Commerce Department, the Labor folks just released revised productivity numbers for the first quarter as well; a stunning downward revision from a barely positive reading to a negative 1.7 percent, for both Q1 of this year and Q4 of 2012. I’m no conspiracy theorist, but when you see “rounding errors” like these coming from our government, you really have to wonder whether it’s become administration policy to put the best possible face on them first, and hope no one notices the downward revisions later.

Now, about those “rally” numbers: I heard a market analyst the other day state that, measured since March 9, 2009, the notorious “dreadful bottom” of the last market slide—the Dow Jones Industrial Average is up nearly 138 percent, a dizzying return of over 31 percent per year over the last 4½ years. What was he implying, I wondered—that this was sustainable as some sort of “new normal,” on the way to “Dow 36,000” again, the much-maligned book written in 1999 that claimed we’d see the stratosphere by 2005? Surely, he wasn’t saying that?

Then I did some math of my own: After all, when one calculates the Dow’s return since Oct. 9, 2007, the peak of the previous bull market (prior to the sell-off whose bottom he conveniently chose as his starting point), the DJIA index is up only 9.6 percent in 5¾ years, or an average annual return of not quite 1.7 percent, not exactly a ringing endorsement for stock market nirvana.

While those are both extreme examples, let’s take a more realistic starting point. From the start of the current millennium, Jan. 3, 2000, the S&P 500 (a far broader and more diversified representation of what the stock market has done) is up 12.7 percent in 13 years and eight months, an average annual increase of just 0.9 percent, far below its historical average of 8.3 percent and not even in the same neighborhood as the 31 percent yearly pace touted by the over-enthusiastic analysts on some business networks. If we then remember that this stellar yield has been achieved largely with the aid of an accommodative Federal Reserve chairman who has, since taking the helm, essentially quintupled the nation’s money supply, one could begin to wonder what future price—in devalued currency, inflation, and loss of international standing—we may yet pay as a country for keeping the economy limping forward and the stock market propped up. Since 2008, the assets on the Fed’s balance sheet have ballooned from $480 billion to a staggering $3.5 trillion.

And if you thought the economy was crawling before, just wait until the implementation of Obamacare begins in early October and really hits the economy come January. The entire service sector of the economy has already warned us of the end of the 40-hour work week, as restaurants, hotel chains and the like have announced cuts to all hourly employees to below 30 hours per week, to say nothing of the many regulatory and filing burdens all businesses will have to comply with.

Finally, keep in mind that while share prices have been rising, trading volume has been declining as fewer private investors are staying the course and mostly institutional and professional investors remain. Bill Gross, John Bogle and Jeffrey Gundlach have all directed their clients to either pare back their risk exposure significantly or get out of the market entirely. In mid-August, billionaire investor George Soros placed a bearish call on the S&P 500, increasing the put position (a bet that the S&P 500 is going lower) from 1.28 percent of his fund in the first quarter, to 13.54 percent today, a clear sign that Soros thinks the end of this rally is imminent.

Caveat emptor, my friends: Buyers beware.

Thomas K. Brueckner, CLTC, is president/CEO of Strategic Asset Conservation in Scottsdale, a conservative wealth management firm with clients in 18 states and 6 countries. He is a 2011 Advisor of the Year national finalist, a radio talk show host, and a mentor to other advisors nationally. He may be reached for comment at go2knight.com.