The latest figures from the Bureau of Economic Analysis show that US GDP grew at an annual rate of 3.8 percent in the fourth quarter of 2004, unchanged from its preliminary estimate.
James Picerno of The Capital Spectator points out that this is lower than the consensus estimate of 4.0 percent. Highlighting the role of the consumer in driving fourth quarter growth, he says:
Presumably, [the consumer] will be at the forefront of any first-quarter GDP advance as well. But it's an open question if the stock market sees the same future unfolding. The S&P 500 has slipped 2.5% so far this year. That's hardly a ringing endorsement of the notion that the economy has continued to hum along this year. True, earnings have been quite strong in recent quarters, but on a valuation basis the trailing price-earnings ratio remains stuck around 20, or roughly where it's been since last summer.
The view from the equity markets doesn't get any better if you break stocks into growth and value components. The Russell 1000 Growth Index (a proxy of large-cap growth stocks) is off more than 8% year to date. That's a steeper fall than the 5.6% loss YTD for the Russell 1000 Value Index, and more than two times the red ink logged by the broad market, measured by the S&P 500.
So what's an optimist to think? Perhaps he can start with some questions. How about this teaser: Shouldn't growth stocks be taking the lead over value stocks if the economy is advancing at a healthy clip? Or, are we to conclude from the recent meanderings of the major indices that Mr. Market has stumbled in connecting the macro-economic dots to equities.
Clearly, the stock market was encouraged today by the drop in oil prices and the confirmation that the fourth-quarter GDP exhibited decent growth. But additional declines in oil are needed to inject more life into stocks. Meanwhile, the consumer needs to keep spending. The two may be connected to a degree that some investors aren't yet willing to accept.
... "It's clear that concerns over prices -- especially gasoline -- are hitting consumer confidence hard," says Jerry Thomas, president and CEO of Decision Analyst...
A weaker American consumer would, of course, also hit Asian economies and their stock markets. As I have pointed out in recent posts, the news flow on the Asian front has not been good of late.
And things look little better in Europe. After the recent releases of the findings from the German IFO, Italian ISAE and INSEE surveys, Morgan Stanley economists Eric Chaney and Elga Bartsch wrote yesterday that "there are few doubts in our view: the European manufacturing sector is currently experiencing a sharp slowdown, which might turn into outright contraction in the second quarter".
Of course, such slowdowns often prove temporary. Picerno, for one, harbours the hope that oil prices may yet fall, pointing out that "[c]rude oil stocks continue to rise, and now reside in the upper half of the average range for this time of year". Chaney and Bartsch think that the slowdown in the European manufacturing sector is "a temporary correction". Japanese industrial output, despite falling in February, is expected to rise in March and April.
However, all these possibilities may be less relevant to stock investors than the fact that the world economy appears to be persistently flirting close to recession, dependent on the debt-laden American consumer and thus vulnerable to shocks on the downside.
With a market trailing price-earnings ratio -- as Picerno puts it -- "stuck around 20", have stock investors sufficiently taken this vulnerability into consideration?