Roughly 18 months ago,
I spelled out
the relationship between economic growth and thestock market
My key takeaway still stands: "The difference between 2% and 3%
(economic growth) may not seem like much, but it is." Although it
is an inexact science, quarterlygross domestic product (
) has subsequently been a pretty good harbinger of stock market
activity. The market rallied nicely higher in the fourth quarter of
2011 and the first quarter of 2012, at a time whenGDP growth
averaged roughly 3%.
And it's no coincidence that the S&P 500 has risen just 3.6%
since the end of 2012's first quarter. Theeconomy has had only one
decent period of growth in that time (the third quarter), and JP
Morgan cautions that the end of 2012 finished on a weaknote . (The
official government figureswill be released on Jan. 30).
Right now, clear signs are emerging that the U.S. consumer is ready
to boost spending.
As I noted in early January
, consumer debt loads are now in reasonable shape and
households again have the capacity to increase borrowing.
as I noted back in December
, economic data points emanating from the corporate sector are not
nearly as robust.
Still, on balance, the U.S. economy is giving off signs of
increasing strength. And with a few breaks, we may finally be
headed for a period of sustained 3% economic growth -- which would
helpstocks move up to fresh highs. For example, UBS' Maury Harris
expects the U.S. economy to grow 2.1% in the current quarter, 2.8%
in the second quarter and at a 3% to 3.5% pace in the second half
But before we get there, we have another mountain to climb.
Whereas the past fewquarters have been characterized by a looming
"Fiscal Cliff," this coming mountain of worry can be laid squarely
at the feet of Washington as well. By the end of next month,
Washington will need to address the hard choices that it deftly
avoided a few weeks ago.
Signs are emerging that Republican members of the House believe
they have already made all of the tax concessions that they are
going to make. "No newtaxes " is this current rallying crew, which
ostensibly forces President Barack Obama and Democrats to chip away
at the budget crisis solely through spending cuts.
There are two problems with this. First, President Obama and
Democrats are likely to make a strong push for more tax changes,
likely in tandem with proposals to overhaul entitlement spending.
But unless one or both sides are willing to make major concessions,
get ready for another market-rattling showdown in the next
four-five weeks. The media will likely again focus on apocalyptic
government shutdown fears, and the market hates that kind of
The other key problem: even if the two sides manage to make real
progress, then you can count on spending cuts that will make it
hard for the economy to grow at 3% later this year, as UBS' Harris
anticipates. Economists figure that the ultimate budget agreement
that arrives will trim GDP by 1% to 2%. This means the private
economy would have to generate an organic growth rate in excess of
4% to offset that drag. And that's quite a stretch.
Before we start to look out over the course of 2013, you need to
stay focused on the current quarter. Even as investors are
digesting the results ofearnings season , they'll be keeping one
eye on the economic calendar -- especially with regards to
corporate America. Here are three key economic data points that
will arrive before the coming government budget talks really heat
up again. Each of these data points will give a clear read on
whether Washington's intransigence is starting to materially affect
corporate spending plans.
Companies halted their regular spending patterns in the fourth
quarter of 2012 due to Fiscal Cliff uncertainty, sharply blunting
fourth-quarter GDP figures. Investors will find out on Tuesday --
and again a month later -- how the next round of government
budget talks/uncertainty is affecting spending on
The Chicago Fed National ActivityIndex .
The CFNAI posted a surprise rebound in November, the first
positive reading since last March, though the three-monthmoving
average remains negative. We'll get a fresh read for December
when the Chicago Fed releases its latest look next week. This
reading will come near the peak of earnings season for large-cap
stocks, and taken together, we'll have our deepest read yet on
business sentiment for the months ahead.
Feb. 1: Purchasing Managers Index (PMI).
This gauge of corporate sentiment shows an economy that is just
barely moving forward: most subcomponents that make up the gauge
have been barely above 50.0 in recent months, which is the
difference between expansion and contraction. Yet in last month's
report, the survey noted a cautious tone among the businesses
polled: "Many respondents express uncertainty about government
regulations, taxes and globaleconomics in general as we approach
Risks to Consider:
The markets are off to a solid start in 2013, and analysts
generally expect the current earnings season to be mostly positive,
especially since analysts sharply lowered their forecasts for the
quarter in recent weeks. Still, tepid forward guidance could create
just enough noise in the market as we head into the crucial month
of February when government budget talks heat up.
Action to Take -->
If the market and the economy can survive the next six weeks
without too much damage, then the stage may be indeed for a rising
economy in 2013. And if we start to head toward a 3% GDP growth
rate later in the year, as UBS anticipates, then the S&P 500
would likely be poised for yet another year of double-digit
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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