Get Ready for an S&P Market Meltdown


It was a relatively quiet day on the stock market. The S&P500 backed off a little, but it’s had a pretty good run lately. We’ve been telling our subscribers that the market is set up for either a meltdown or a melt-up. We’re sitting in the meltdown camp.

The S&P500’s rally back towards the July/August highs appears to lack conviction and momentum. It’s pretty much accepted on Wall Street that the Federal Reserve will start its ‘tapering’ campaign next week, so this is probably giving stock market bulls pause for thought. That is, if QE was largely responsible for the market’s five year, 150% price rally, then maybe it’s a bit much to expect more of the same with less QE.

Keep in mind that corporate earnings in the US are no longer growing. Actually they haven’t grown in a while. According to this table, sourced from S&P data, the last quarter of positive earnings growth for S&P500 companies was June 2012, where it registered an annualised growth rate of 4.83%.

Since then earnings growth has stalled, and for the latest data (to March 2013) annualised earnings actually declined at a 0.95% rate.

So since June 2012, the market has relied on ‘multiple expansion’ to keep heading higher. That is, the price paid for those stagnant earnings must increase to keep stock markets elevated. And when we look at this table, that’s exactly what we see.

In July 2012, the S&P500’s price-to-earnings ratio was 15.55. The most recent reading is 19.20. That represents a ‘multiple expansion’ of 23.5%. And how much has the S&P500 increased over that time? 21.5%. Add in a few percentage points in earnings decline and there you have it. The stock market’s rally since late 2012 is all down to a confidence inspired multiple expansion.

Confidence in what though? The Fed? It’s waving the white flag and pulling back from its QE theory. Confidence in earnings growth? Earnings have gone nowhere for nearly a year. Confidence in the government? C’mon…

In a sign of just how low the Obama administration has sunk, at least in terms of foreign policy, you’ve got Vladimir Putin playing the peace loving hippy, writing in the New York Times imploring the US to stick with the UN and work to seek a peaceful proposal to the Syrian conflict.

‘The potential strike by the United States against Syria, despite strong opposition from many countries and major political and religious leaders, including the Pope, will result in more innocent victims and escalation, potentially spreading the conflict far beyond Syria’s borders.’

We’re glad Putin seems so concerned about the Syrian people’s fate. And while he did point out that chemical weapons were more likely used not by the Syrian government but by the rebels seeking to bring the US into the war, he made no mention of gas or pipelines. Don’t mention the war, Vlad.

We’ll wrap up the week with a look at the Aussie jobs numbers. Employment in August fell by 10,800 jobs, on expectations of a 10,000 increase. The unemployment rate edged up to 5.8%. The monthly number doesn’t give you much to go on, but the trend has been toward higher rates of unemployment. In April 2011 the unemployment rate was 4.9%.

That’s roughly when interest rates peaked too. So lower interest rates haven’t managed to stop rising unemployment, but they have sparked a renewed property boom. That should do wonders for Australia’s already abysmal productivity performance. The last thing we need is to have more potentially productive capital going into the already overheated housing market.

Tony Abbott’s got some work to do. There’s some low hanging fruit he can easily pick off, but to get genuine reform happening and get productivity growth back to healthy levels, he’ll have to make some unpopular decisions. Unfortunately, it’s unlikely to happen in his first term of government.

Greg Canavan+
for The Daily Reckoning Australia

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From the Archives…

Emerging Markets Walk The Tapertalk
6-09-2013 – Nick Hubble

House Prices Halve Without a Recession
5-09-2013 – Nick Hubble

A Manufacturing Industry Revolution
4-09-2013 – Nick Hubble

How the RBA is Using Low Interest Rates to Destroy Your Wealth
3-09-2013 – Nick Hubble

Is the Stock Market Predicting War?
2-09-2013 – Nick Hubble

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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3 Comments on "Get Ready for an S&P Market Meltdown"

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3 years 1 month ago

I am just enjoying the absolute bliss of silence on the political front after the last few years. No scandals, no press conferences, no squawking and carrying on – just bugger all. Let’s hope they keep this us, fat chance I guess but what a delight it is to hear nobody for a change.

slewie the pi-rat
slewie the pi-rat
3 years 1 month ago
i’ve got a prediction. look out! Fukushima + The Tokyo Olympics >===>> w.w.learning and thinking i’m getting that ~2.5 years, post-quake/tsunami, people are accepting that there is nothing that can be done. but very few people know the facts. a) they suck. b) maybe they [the facts] generally support that acceptance, but still… many know only the spin and the ‘move along, please; do not question official statements’. so, with this going ‘Olympic’ i think global factual knowledge will increase, because of the athletes heading Gamesward, the tourist & media aspects, and Reality. this increase may not be as common… Read more »
3 years 1 month ago

Remember how Lloyd’s names have at times taken it in the neck with capital calls. Not so bad a deal if you own the market going forward and they recover their mispricing of the risk.

This one though, TBTF is all they’ve got.

Wonder how much their investors dollar of capital turns into in bank capital dollars?

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