economy

barrons money poll runnymede

Bulls (and Bears) Gain Ground in Barron’s Fall Big Money Poll

This week's Barron's cover story features the results of their semi-annual Big Money Poll. In the spring, a record 50% of respondents categorized themselves as neutral about the market's prospects through year end. This looks like a good call as the market traded sideways to slightly down since the spring.

In the latest fall survey, it found that the pros are slightly more bullish than in the spring. 55% of respondents call themselves bullish through next June, up from 45% in the spring survey.

Even though the bulls have increased, this doesn't mean that it will translate to big gains in the stock market. Based on their mean market forecasts, the Big Money bulls see the Dow ending the year at 17,140 which is below yesterday's close. The bulls expect the Dow to reach 17,965 by the middle of next year, for a slight gain of 4.3% from here.

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The Fed Shows Their Next Recession Plan: Negative Interest Rates

While many economists have been (incorrectly) predicting a September rate hike from the Fed, Runnymede has been saying that the Fed won't hike rates since the beginning of the year and with recession on the horizon believe that there may be no rate hike in 2016 either.

With growth slowing around the world and inflation at zero, the Fed is unlikely to move rates off the zero level. In any case, the most surprising news from the September FOMC meeting is that one member predicted negative rates in 2015 and 2016! Yes you read that correctly. While the majority of the Fed is still predicting (poorly) a rate hike in 2015, there is one member that wants to go to negative rates. In Europe, the Swiss, Swedish and Danish central banks already have negative rates to stave off the risk of deflation.

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S&P earnings to suffer annual decline for first time since 2008

At Runnymede, we firmly believe that earnings matter. It's earnings that drive stock prices higher or lower over the long term. So it is important to monitor what is happening to the overall earnings picture. In February, I wrote a blog post entitled, Where have all the (S&P) earnings gone? Back then street estimates had been reduced significantly but still predicted 5% growth for 2015.

Today the earnings picture is clearer with most of the S&P 500 constituents having reported for the first half. The results aren't pretty. Thanks to the crash in energy prices and the strong US Dollar, S&P 500 earnings declined in the first half and are on pace for their first year over year decline since 2008. In hindsight, S&P earnings experienced peak earnings in the 3rd quarter of 2014 with a record high 10.1% operating margin; and have been declining thereafter.

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The invisible hand of central bankers and government intervention

The financial markets are guided by supply and demand conditions for stocks and bonds. Historically, their fluctuations have been heavily influenced by business conditions and economic cycles. During the past 12-15 months something new and different has dominated the marketplace. Unorthodox governmental forces are the engine that drives the financial markets which seem totally insensitive to any negative economic developments.

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Follow the Loser: The Abnormal Behavior of Central Bankers

In sports, business or most avenues of life, people are encouraged to learn, imitate or follow the winners. In golf, we want to learn from Rory Mcllroy, Adam Scott or Phil Mickelson. In tennis, we want to emulate Novak Djokovic, Roger Federer or Rafael Nadal. To this motivational wisdom of following the winners, there is one exception, however. Central bankers seem to like to follow the loser.

Quantitative Easing (“QE”), creating money to buy bonds issued by the government, was first used by the Bank of Japan in the early part of the 2000’s. Japan was once known as the land of technological and engineering marvels, but more recently it has become known as one of the worst-managed economies in the world. The lost decades of the 1990’s/2000’s have extended into the 21st century, with subpar economic growth, Fukushima radiation out of control and a declining population amongst the list of negative trends.

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