CNBC, Fox Business and Bloomberg feed us a steady stream of bullish analysis. Barron’s, The New York Times and the Wall Street Journal push more of the same, and amplify the bullish message: buy stocks now, they are undervalued. However, these analysts have been consistently wrong. A new McKinsey study analyzes this phenomenon:
“Analysts have been persistently over-optimistic for 25 years,” a stretch that saw them peg earnings growth at 10 percent to 12 percent a year when the actual number was ultimately 6 percent. “On average,” the researchers note, “analysts’ forecasts have been almost 100 percent too high,” even after regulations were enacted to weed out conflicts and improve the rigor of their calculations. …[A]nalysts have been forced to lower their estimates after it became apparent they had set them too high. See For Analysts Things are Always Looking Up.
Why the persistent bullishness? Human beings are optimistic and want to believe in good outcomes. And why not? When the markets rise, Wall Street investors make more money. Bullishness comports with the Administration’s political agenda to make Americans feel better. When Americans are bullish about the economy and spend more money, they set the stage to create a virtuous self-reinforcing economic recovery.
Unfortunately, this economic recovery is different from previous post-war recoveries and does not respond in the same ways.
What are Stocks Worth?
David Goldman in Inner Workings writes some of the most incisive commentary on the markets. He believes that stocks may trade in a range of Dow 8,000 to 12,000 and at the moment, at Dow 10,000 probably reflects an accurate value for the market. However, he is worried about a “double dip” recession, which is a renewed downturn in the second half of this year and cites five areas of concern:
- Fiscal austerity and bank failures in Europe could transmit economic weakness to our banks and economy.
- US consumers will continue to be under pressure from poor employment prospects and a declining housing market. Focusing on a housing recovery, Goldman pours cold water on that thought:
The notion of a housing recovery seems fanciful when America has only 25 million households with two parents and two or more children, but 72 million housing units with three or more bedrooms. The baby boomers bought far more house than they required and hope to sell it at a profit; now they will retire to smaller quarters and the overhang of large-lot single family homes may take decades to work off. See What are Stocks Worth?
3. Fiscal austerity is already taking place at the state and municipal level.
4. Pressures are increasing to reign in federal deficits.Asia will not turn out to be the growth engine leading the US and the world out of recession.
5. Analysts are underestimating the negative wealth effect from losses in the housing and equity markets.
The Great Correction
Bill Bonner, founder of the Daily Reckoning, calls our current economic environment the Great Correction. See Heavenly Recovery or Hellish Correction? We are paying the price of becoming overly indebted. The “recovery” spotted by so many pundits differs from all post-war corrections:
- We would have seen a recovery in jobs. Since the beginning of the correction 8.2m jobs have been lost and none recovered.
- Inflation would have increased.
- Money supply would have increased and people would have been borrowing, spending and investing.
- Housing would be on the upswing with prices recovering.
We have spent trillions of dollars to try and stop a correction and we are failing.
Think More, React Less
Bonner and Goldman are two of the most incisive and prescient economic and financial analysts and are cautioning investors. While I do not give investment advice on this blog, perhaps this is one of those times where we need to turn off financial television, put down the newspaper and ignore the financial markets. The spin can make us both dizzy and poorer.
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- Lack of Skepticism and Imagination Can Be Harmful to Your Financial Health
- The Failure of Extrapolation
- Unintended Consequences of QE2
- Surfing the Financial Crisis
- Goldilocks and Scary Headlines
Tags: Barron's, Bill Bonner, Bloomberg, CNBC, David Goldman, Inner Workings, jobless recovery, stocks, The Daily Reckoning, The Wall Street Journal
