The World is Ending and Stocks are Plunging (Again)

The major news magazines want you to know that The Debt Crisis Is Even Worse
than You Think (last weeks cover of BusinessWeek , printed in red ink), or that
Europe and the United States are now Turning Japanese in a New Politics of
Paralysis (the cover of The Economist ). Their implication, of course, is that
this has never happened before. We are in uncharted waters, so your wealth is at
risk. On the surface, this scary story is an easy sell. On Tuesday, stocks fell
for the seventh day in a row. The Dow fell 266 points, its worst day since Aug.
11, 2010. On the same day, gold soared to $1,660 per ounce, an all-time high,
even though oil fell 1.2% to $93.79. Then, on Wednesday, the mood worsened. The
Dow fell another 150 points on the opening and gold gained $12 to $1672 (while
oil sank to $92). Wednesday closed slightly up, breaking the string of eight
straight negative days, but Thursday was much worse, with the Dow down more than
512 points, while NASDAQ and the S&P fell nearly 5% on average. Even gold took a
tumble, falling $15 to $1,650, and oil fell more than $5 to $86. Meanwhile,
90-day T-bills offer just 0.01%, while two-year Treasuries sank to a record-low
0.27%. The yield curve is orderly but deflationary: Five-year Treasury yields
fell to 1.09%, 10-years to 2.42% and the 30-year fell to 3.68%. All of a sudden,
it looks like the bull market of nearly 30 months is over and hurricane season
has begun. Lets seek some balance on yesterdays news. Lets look at both sides of
the story. True, the government doesnt know how to balance its budget, but U.S.
corporations have stockpiled trillions of dollars in excess cash. We have high
jobless rates, but the flip side of that fact is that companies are getting more
done with fewer people. True, the U.S. economy is growing slowly, but corporate
earnings are soaring. While the big headlines say that the U.S. GDP rose only
1.3% last quarter, the revenues and earnings of the 393 (78.6%) reporting S&P
500 companies are both up by an astonishing 13% over the second quarter last
year. Thats tenfold faster than GDP growth! And if you exclude the sick
financial sector, revenues are up 15.6% and earnings are up 22.2%! So far, the
S&P earnings are 6.4% above analysts estimates! These stellar earnings show no
sign of slowing. Analysts now expect to see even stronger double-digit earnings
growth in the third and fourth quarters, in all categories. According to
economist Ed Yardeni, large-cap forward earnings have risen in 42 of the past 44
weeks, mid-cap forward earnings have risen in 20 of the past 21 weeks and
small-cap forward earnings have risen in 42 of the past 47 weeks. How can
corporations keep growing while the domestic economy is anemic and government is
clueless? Most major U.S. businesses are multinational, so they can profit from
the double whammy of a rapidly growing global economy and a weak U.S. dollar.
Companies can cut costs; governments apparently cant. Bottom line, the market is
not likely to keep falling sharply while earnings keep rising. In the last
double-dip recession (1979-82), corporate earnings were falling. Thats not
happening now, and its not likely to happen for the next few quarters at least.
In addition, the stock market always rises in the third year of the four-year
presidential cycle. With the S&P now under water for the year so far, this
election cycle history implies a late-year 2011 recovery like what began last
August, after the Fed announced its QE2 plans.