As for the balance of the year, I still anticipate a deceleration of U.S. GDP growth (to about +1.5% real GDP in the last three quarters of the year), reflecting the cumulative impact of the fiscal drag (government spending cuts and rising taxes) and a potentially spent-up consumer -- February retail sales are out on Wednesday. February and March retail sales will be watched closely, and I am fearful that a we will witness a bigger hit to consumer spending than is generally expected. If I am correct, many economic data points (e.g., jobs growth back to monthly gains of 150,000 or less) will be deteriorating.
Fourth-quarter 2012 S&P 500 profits were only slightly better than I had expected, but there is downside risk to the real economy (GDP) and profits are at risk from sequestration and a stronger U.S. dollar. Moreover, a stronger U.S. dollar, though good for lower inflation, is bad for export and profit growth. Finally, as I have written, first-quarter 2013 earnings guidance was generally weak and below consensus expectations.
Meanwhile, a "grand fiscal bargain" appears unlikely.
SummaryIn a market that has generally been ignoring macroeconomic concerns, it has become popular to reject and even scoff at any emerging and potentially negative big-picture issues. I think that view will prove to be a mistake -- as it almost always is. (This is especially true given the artificiality of zero interest rates and time limitations of global easing). Big-picture concerns are real, but more importantly, they are important influences on the microeconomic picture. Our economic world is flat and interconnected. To believe otherwise may prove harmful to your investment well-being and health.
Mixed World Economies
- The weaker-than-expected weekend data for China seen in a vacuum weren't terrible, but in a materially overbought market, the moderating data (especially in the consumer sector) could, at the very least, stall the U.S. stock market's momentum.
- The same can be said for the Eurozone's economy -- weak and weakening.
- The U.S. economy is slightly stronger than I expected earlier in the year, but a stronger U.S. dollar portends some risk to the downside for S&P profits and export growth and a deceleration in the rate of GDP growth continues as my baseline expectation.
Global Easing Embraced by Investors
- Market participants have been eager to capitalize on the global easing theme and the slightly more favorable macroeconomic picture than I expected by taking up valuations (and P/E multiples) since the beginning of the year.
Short-Term Risks Rise as Enthusiasm Grows
- P/E multiples have risen.
- Stock prices have benefited from an improvement in sentiment and perception rather than by an appreciable change in fundamental (profit) expectations for 2013.
- Given the near unprecedented consistency of the U.S. stock market's rise, the factors above could combine to halt the upward momentum over the near term.
Where I Could Go Wrong in My ForecastI will continue to be wrong-footed regarding the U.S. stock market if:
- the S&P's profits come in better than I am projecting;
- investors continue to elevate P/E multiples; and/or
- a grand fiscal bargain surprises.
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