With the market recovering
only slightly last week, I am once again reminded of my admonition that the market and the economy are not
interchangeable, one-and-the-same phenomena.
In fact I coined the term parallel
disconnect to refer
to two paths which seemingly move in lock-step, but which are not innately
connected in any way. To be sure, they
are sometimes confused one for the other, but in real terms the events and
triggers which guide one do not necessarily, or specifically, impact the other.
This constant debate that the
global financial markets reflect directly the condition of the global economy
can be disproved both anecdotally and quantitatively. Do you actually believe your job becomes more
secure simply because stock prices are rising?
I’ve got news for you. Rising
share prices, and greater wealth for shareholders, influences not in the least
your job stability. One might even
observe that building higher valuations in the face of low employment emboldens
companies not to hire as long as they
can eke profitability out of their workforce.
I am certainly a capitalist,
although some might impute political motivation behind my commentary, but I
know when I’m being taken to the cleaners.
As a scientist my job is to observe patterns of earnings acceleration
and stock price performance. But my data
clearly indicates that today’s rising stock prices are being manifest from
lower demand, smaller workforces, and greater speculation by those desperate to
find or initiate trends. Thus the parallel disconnect continues.
Any uncertainty over the market versus economic trends serves
only to dampen enthusiasm for economic spending and to impede secular thematic
trends. All the way through, acrimony
supplants harmony as weekly news and data become more disagreeable.
In exchange for this discord, we are left with longer
periods of uncertainty, but tighter and higher levels of market
volatility. Clearly, today, the markets and the economy are not operating in lock-step, nor are they
one-and-the-same.
Ceiling above.
Can we find any solace? Sometimes a timeout, or capitulation, is
necessary to review the landscape more effectively. Last Friday’s downside reaction was
emblematic of that disintegration. You
can’t go into battle and simply expect to forge straight ahead. All the more reason that quantitative,
parabolic studies make sense. As in
life, most phenomena move in cycles, ebbing and flowing. The
big mistake of the dot.com era was in thinking that technology, and the
markets, forever forged onward in a linear (straight line) fashion. We/they found out otherwise, as I had
previously predicted.
How long can market-makers
keep forging success out of inert economic news? Posturing and posing only lasts for so
long. The latest economic data is still
below expectations on a quarter-by-quarter evaluation. Yet, we just keep creeping along. Additional
downside cycles are likely, in my estimation, because Relative Strength
Quotients (RSI) and valuations are still too high. Additionally, we need greater sector breadth
participation in order to reverse the existing bear cycle.
There is no ambiguity in the
global headlines or numbers. Only in the
way the markets seem to be responding to them.
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