S&P 500 growth versus GDP growth

Other than a mini correction in April 2011, that was triggered largely from the European sovereign debt crisis, the S&P 500 (^GSPC) market price has continued to grow annually on average by 15.4% + 0.1 SD (median value of 13.1%) these last 6 years.  During this same six years the economy has limped along at an average annual growth rate of just 1. 4 % +  2.1. (median value of 2.3%) .

With the S&P 500 at an all time high and companies reporting 2015 first quarter results that coincide with major league baseball’s opening day,  it’s time to ask as investors, “Is the present bull market in the 7th inning stretch or are we closer to the bottom of the ninth, two outs and S&P 500 at bat ?

 

Year	Annualized growth rate S&P 500 ( %)	Growth Rate US GDP (%)
2007	3.5	1.8
2008	-38.42	-0.3
2009	23.47	-2.8
2010	12.79	2.5
2011	1.54	1.6
2012	13.38	2.3
2013	29.72	2.2
2014	11.43	2.4
2015*	2.5	2.3 to 2.7
*YTD as of 2-28-15 & GDP estimate

 

 

Three strike, Yerrrrrrr.. OUT!

Investors deciding whether to buy, sell or simply stand pat in this market face three near-term challenges:

Strike 1. A weakening economy that may see first-quarter gross domestic product grow by less than 1 %.

Full-year 2015 GDP projections by economists fell from a range of 2.6% to 3.0% in December 2014 to 2.3 % to 2.7 % this March week following comments from Federal Reserve.  Core inflation which excludes food and energy prices dropped from an expected 1.5 % to 1.8 % range to the new range of 1.3 % to 1.4 %.  Headline inflation which includes energy and food the total inflation rate has declined from a December expectation range of 1.0% to 1.6 % to a range of 0.6 % to 0.8 %.

Strike 2. Deteriorating corporate earnings that could see an annualized profit loss on the S&P 500 for 2015.

According to S&P Capital IQ the S&P 500 is expected to show just 0.3 percent profit growth for the full year and down from an expected 8.6 percent  prediction as recently as Dec. 1.

Most would agree that the S&P 500’s rally off the March 2009 low was, and still is,  largely driven by the extreme easing measures from the Federal Reserve. Should business earnings flatten or modestly decline, as they now  appear to be doing, further stock market gains would prove hard to achieve at best.

Strike 3.  The Federal Reserve is expected to tighten monetary policy at a time when central banks around the world are loosening theirs. This has lead to a strong US dollar.

According to Bank of America the dollar is set for its strongest quarterly strengthening since 1992,  due in large part from  the market’s expectation that the Federal Reserve will increase interest some time in the second half of this year. The US rates being now far higher than those of European nations or Japan will cause the dollar to get stronger as investors buying US bonds a better deal over those offered by other nations.

Take home message

Time for more investors to be selective before they swing away on their next stock purchase .

Resources

Cox, J. 2015 There’s a huge sentiment split building in market.  CNBC

 Annualized Growth Rates of the S&P500

GDP Growth (annual %)

Cox J. 2015 Fed removes ‘patient’ but says no April hike coming