Stocks, Bonds Sending Mixed Signals To Investors

The stock and bond markets are sending two different messages. And, unfortunately for stock investors, the way I am reading the tea leaves, it’s the bond market that’s got it right.

That means profit-seeking investors need to be on guard and “put the hedges on” because as Warren Buffett reminds us, the first rule of making money is “never lose it.” And rule number #2 is “never forget Rule #1.”

And currently, we are in a situation where stock valuations are high on the expectations (and hope) that corporate earnings are going to have a strong year in 2017. And this makes stocks vulnerable to a pullback if corporate earnings don’t come through as anticipated.

The chart below is from respected economist Ed Yardeni’s weekly stock-market briefing.

Ed and his team spend a lot of effort putting this information together, and it’s a very useful tool for investors. To create the chart, Ed’s team surveys the leading stock market analysts on Wall Street and tallies their opinions about earnings-growth estimates for the specific sector or industry in which they provide expert coverage.

After collecting all the information, Ed’s group crunches all the data together and provides an average-expected-earnings growth rate for the entire U.S. stock market as measured by the S&P 500.

Take a look at the upper right-hand corner of the chart. You can see for yourself the expected average consensus for 2017’s quarterly year-over-year earnings-growth rates as expected by the world’s-best analysts for the companies they cover.

As of April 20, that’s 10.3% growth for Q1, 8.0% for Q2, 8.9% for Q3 and 13.3% for Q4. Those are indeed high expectations for corporate America.

Now look at the chart below from the Conference Board. The Conference Board is an independent highly respected think tank that provides economic data to business leaders and corporations around the world.

This chart reports the expected overall growth in real GDP and consumer spending in the U.S. in 2017 and beyond. And it’s telling us that in 2017, the Conference Board’s world-renowned economists are expecting 1.9% GDP growth in the first half of 2017 and 2.3% in the second half.

What’s more, real consumer spending in the U.S. — remember that consumer spending represents about 70% of the U.S. economy — is expected to plug along at a corresponding average growth rate of only about 2.15% (1.7% plus 2.6% divided by 2) in 2017.

You should also know that the Conference Board’s numbers for economic growth in the U.S. are in-line with those from the U.S. Federal Reserve, the International Monetary Fund and the World Bank. This supports their credibility, meaning the Conference Board’s estimates are not outliers.

Now here’s the rub…

How do you get quarterly corporate earnings growth numbers in the U.S. of 10.3% for Q1, 8.0% for Q2, 8.9% for Q3 and 13.3% for Q4 for 2017 in an economy that’s only growing at about 2% in real terms?

Obviously, you can’t. It’s too big of a gap to bridge. The U.S. corporate sector can’t grow at about a 10% rate when the overall economy and consumer spending in the U.S. are only growing at 2%. It just can’t happen!

Now look at my favorite market metric: The yield on the 10-year U.S. Treasury. If you are a regular reader of my Money and Markets columns you’ll know why I believe it’s the perfect predictor.

Except for a recent dip, it’s trading in a post-Trump-election yield range of 2.4% to 2.6% which means that the bond market believes the economists’ forecast of anemic growth; not the Wall Street analysts’ view through rose-colored glasses.

That’s because there’s no way the yield on the free-market-controlled 10-year U.S. Treasury would be at its current level of 2.3% if the bond market expected high single-digit or low double-digit growth rates for the economy or in corporate earnings.

As a 30-year Wall Street veteran, I know that the debt markets are the best and most accurate indicator of market stress. And currently they are saying that expert Wall Street analysts are way off the mark. I also know that it’s often Wall Street’s job to sing a merry song to sell the products they are foisting onto their customers. Therefore, I’m always skeptical about the consensus Wall Street view.

So here’s the question …

The analysts or the economists — who do you believe?

As the editor of the Safe Money Report and proponent for the everyday investor, I’m siding with the economists and the bond market. That’s because as Billy Beane, of Moneyball fame says, “Hope is not a strategy.”

The best advice I can give you is “put your hedges on or have them handy.” Because when the Wall Street analysts wake up to the reality of the deflationary and slow-growth world in which we find ourselves, it will mean “look out below” for stocks around the globe.

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) rose $0.08 (+0.04%) in premarket trading Friday. Year-to-date, DIA has gained 6.12%, versus a 6.88% rise in the benchmark S&P 500 index during the same period.

DIA currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #5 of 75 ETFs in the Large Cap Value ETFs category.

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