{"id":4822,"date":"2014-10-07T05:38:00","date_gmt":"2014-10-07T12:38:00","guid":{"rendered":"http:\/\/staging-prblog.paladinregistry.com\/blog\/?p=4822"},"modified":"2014-10-07T05:38:00","modified_gmt":"2014-10-07T12:38:00","slug":"disconnect-economy-corporate-earnings-stock-market","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/disconnect-economy-corporate-earnings-stock-market\/","title":{"rendered":"A Disconnect Between Our Economy, Corporate Earnings, the Stock Market?"},"content":{"rendered":"<p><a href=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/disconnect-economy-earnings-market.jpg\"><img loading=\"lazy\" decoding=\"async\" width=\"300\" height=\"174\" class=\"alignleft size-medium wp-image-4835\" src=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/disconnect-economy-earnings-market-300x174.jpg\" alt=\"disconnect economy, earnings, market\" srcset=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/disconnect-economy-earnings-market-300x174.jpg 300w, https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/disconnect-economy-earnings-market.jpg 620w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/a>It is hard to remember another time when there were so many different opinions regarding the future direction of the stock market.\u00a0 The \u201cbulls\u201d often support their argument by pointing to corporate earnings strength and falling unemployment while the \u201cbears\u201d commonly cite the slow pace of economic growth and a stock market that is at, or near, all-time highs.<\/p>\n<p>The following chart shows two ratios commonly referenced when evaluating current stock valuations:<\/p>\n<p><a href=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/US-Total-Market-and-SP.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-4826 size-full\" src=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/US-Total-Market-and-SP.png\" alt=\"US Total Market and S&amp;P\" width=\"650\" height=\"384\" srcset=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/US-Total-Market-and-SP.png 650w, https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/US-Total-Market-and-SP-300x177.png 300w\" sizes=\"(max-width: 650px) 100vw, 650px\" \/><\/a><\/p>\n<p>The first chart compares US Total Market Capitalization to Gross Domestic Product (TMC\/GDP) and will increase when stock prices increase at a faster rate than the economic output of our economy.\u00a0 The ratio has grown dramatically since 2009 and is fast approaching levels not seen since the dot-com bust of 2000.<\/p>\n<p>The second graph is a cyclically adjusted price-to-earnings ratio of the S&amp;P 500 index (<a href=\"http:\/\/www.investopedia.com\/terms\/p\/pe10ratio.asp\" target=\"_blank\" rel=\"nofollow\">also known as the CAPE or Shiller P\/E<\/a>) which smooth\u2019s earnings figures by averaging the past 10 years of corporate earnings data. \u00a0It is a measure of stock prices relative to corporate earnings (reported on per share basis).\u00a0 This too, has risen quickly and is close to levels last achieved in the run up to the financial crisis of 2008\/9.<\/p>\n<p>Charting the two ratios together:<\/p>\n<p><a href=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/Combined-US-Total-Market-and-SP.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-4828 size-full\" src=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/Combined-US-Total-Market-and-SP.png\" alt=\"Combined US Total Market and S&amp;P\" width=\"650\" height=\"384\" srcset=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/Combined-US-Total-Market-and-SP.png 650w, https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2014\/10\/Combined-US-Total-Market-and-SP-300x177.png 300w\" sizes=\"(max-width: 650px) 100vw, 650px\" \/><\/a><\/p>\n<p><span style=\"color: #222222;\">Noticing the difference in trajectory between the\u00a0<\/span>TMC\/GDP and the Shiller P\/E over the past few years,<span style=\"color: #222222;\">\u00a0we contend that current stock prices are more overvalued in light of overall economic activity than in relation to corporate earnings.<\/span><\/p>\n<p>There are a number of possible contributing factors to this hypothesis:<\/p>\n<ul>\n<li><a title=\"A Solution to Low Interest Rates during Retirement\" href=\"https:\/\/www.paladinregistry.com\/blog\/retirement\/a-solution-to-low-interest-rates-during-retirement\/\" target=\"_blank\">Historically low interest rates<\/a> the past 5 years have prompted companies to refinance their debt, thereby reducing costs.\u00a0 Doing so has artificially boosted corporate earnings because a dollar saved is a dollar earned, whereas revenue generated from operations does not garner the same 1-to-1 payback due to cost of goods sold.<\/li>\n<li>Lower cost of capital along with other corporate cost cutting measures taken in response to the credit crisis have contributed to record levels of corporate cash, earnings and subsequently the lofty market valuations. All despite a relatively challenging economic environment for businesses to operate under the past several years.<\/li>\n<li>Lower interest rates have created \u201ccheap money\u201d and spurred a spate of corporate bond issuances to finance a significant increase in corporate stock buy-back programs, resulting in a greatly reduced number of shares outstanding in the marketplace.<\/li>\n<li>Finally, the share buy-back activity could also help explain the frustratingly slow pace of our current economic recovery.\u00a0 The capital to buy those shares normally would be utilized for more traditional business purposes; to grow ones company through the hiring of new employees and\/or building new plants and equipment, thus stimulating overall economic growth.<\/li>\n<\/ul>\n<p>Going forward we believe that if economic activity doesn\u2019t increase significantly and justify current stock prices, then it is reasonable to assume a stock market correction will ensue to bring valuations back in-line with historical averages.<\/p>\n<p>The wild card and immediate threat to the prospects for faster growth are interest rates.\u00a0 If interest rates soon begin to rise, that could stymie overall economic activity and increasingly hurt corporations because their opportunity for incremental earnings improvements (that they have enjoyed for the past 5 years) through debt refinancing will evaporate.\u00a0 Whatever comes to pass these are interesting and historic times for our economy and stock market.<\/p>\n<p>Article written by Kenyon Lederer and Jack Zboralske, Investment Adviser Representatives at Pinnacle Asset Management, Inc.<\/p>\n<p><em><strong>To learn more about Kenyon Lederer, view his <a href=\"https:\/\/www.paladinregistry.com\/financial-advisor\/roseville-california\/Kenyon.Lederer\" target=\"_blank\">Paladin Registry profile<\/a>. \u00a0<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>It is hard to remember another time when there were so many different opinions regarding the future direction of the stock market.\u00a0 The \u201cbulls\u201d often support their argument by pointing to corporate earnings strength and falling unemployment while the \u201cbears\u201d commonly cite the slow pace of economic growth and a stock market that is at, or near, all-time highs. The following chart shows two ratios commonly referenced when evaluating current<\/p>\n","protected":false},"author":50,"featured_media":4835,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-4822","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.3 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>A Disconnect - Economy, Corporate Earnings, Stock Market?<\/title>\n<meta name=\"description\" content=\"It&#039;s hard to remember when there were so many differing opinions on the future direction of the stock market. These are interesting and historic times.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.paladinregistry.com\/blog\/investing\/disconnect-economy-corporate-earnings-stock-market\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"A Disconnect - Economy, Corporate Earnings, Stock Market?\" \/>\n<meta property=\"og:description\" content=\"It&#039;s hard to remember when there were so many differing opinions on the future direction of the stock market. 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