Can the stock market rise while the economy stalls?

(MoneyWatch) "The U.S. economic reports continue to impress," says Scott Anderson, Chief Economist at Bank of the West, who notes that the data "reveal a resilient private sector economy that accelerated over the first two months of the year, despite the headwinds from higher payroll and personal income taxes." Not even higher gas prices seemed to get in the way of consumers, who are choosing to dip into their savings to sustain their current pace of spending.

The consensus among analysts, economists and investors is that maybe the U.S. economy is a bit stronger than expected, which may allow it to absorb the sequester. While the effects of the across the board spending cuts will likely impact Q2, for this moment in time, the world wants to party like it's the 1990's all over again. In fact, it was November 1996 when the Dow Jones Industrial Average last logged 10 consecutive winning sessions in a row. The current streak was broken on Friday, though the bulls appear to be firmly in control.

But Lakshman Achuthan, co-founder of Economic Cycle Research Institute (ECRI), is not convinced. In September 2011, ECRI made a recession call, which it then clarified in December 2011. Based on the business cycle research that ECRI conducts, the firm projected that a mild recession would begin by mid-2012, but would not be recognized before the end of 2012.

Achuthan, with whom I have appeared numerous times on CBS and CNN, recently explained the call to me, citing a Fed study from two years ago (read the full ECRI report here). According to Achuthan, based on the Fed's variables, there is no doubt that the U.S. economy had reached "stall speed." He noted that many recessions are only seen in retrospect, after official revisions have occurred. The fact that the economy is likely in a recession means that the Fed's pledge to provide unlimited and ongoing monetary stimulus via monthly bond buying "makes more sense."

What about all of that improving economic data? Achuthan says we should be wary of downward revisions to the rosier than expected reports and that some of the numbers are skewed due to seasonal adjustments. He also notes that there were temporary distortions due to Superstorm Sandy and precautionary actions to the "fiscal cliff."

"But of course, there is the elephant in the room, the impressive upturn in stock prices. How can we possibly be in a recession if the stock market is doing so well?" asks Achuthan. It is important to remember that the stock market is not the economy and the economy is not the stock market.

The Economist recently noted, "It is tempting to attribute the strength of the Dow to optimism about the American economy. Tempting, but wrong. Studies have shown almost no correlation between GDP growth and equity returns...this rally in the Dow has been accompanied by the weakest GDP growth of all the bull markets since the Second World War."

Achuthan wants people to know that "cycles in economic growth and stock prices do not always move together. It is true that 80 percent of the past 15 recessions has associated equity bear markets, but in three of those 15 recessions there not cyclical downturns in stock prices. Specifically, this happened in 1980, 1945 and 1926-1927."

Regardless of whether the U.S. economy is in a recession or not, the conversation with Achuthan underscored that the recent euphoria in the stock market should be taken with a healthy dose of cynicism. As Warren Buffett likes to remind us, we should "be fearful when others are greedy and greedy when others are fearful."

Markets:

-- DJIA: 14,514 up 0.8 percent on week, up 10.8 percent on year

-- S&P 500: 1,560, up 0.6 percent on week, up 9.4 percent on year

-- NASDAQ: 3,249, up 0.1 percent on week, up 7.6 percent on year

-- April Crude Oil: $93.45, up 3 percent on week

-- April Gold: $1,592.60, up 1.2 percent on week

-- AAA nat'l average price for gallon of regular gas: $3.69

THE WEEK AHEAD:

Mon 3/18:

10:00 Housing Market Index

Tues 3/19:

FOMC Meeting begins

8:30 Housing Starts

Weds 3/20:

2:00 FOMC Meeting Announcement

2:00 FOMC Forecasts

2:30 Fed Chairman Press Conference

Thurs 3/21:

8:30 Weekly Claims

8:30 FHFA House Price Index

10:00 Existing Home Sales

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 3/22:

[Baragala]

When the stock market AND the economy are doing well, then the stock market and the economy are tied together. But when the stock market is doing well and the economy is bad, there is no relation? Can't have it both ways, people. Decide which is the truth, regardless of how it makes "experts" look. Not everyone in the country is drooling into their cups. There are many of us who can identify the inconsistencies in the stories presented.

[AmberReimers]

Predicting the stock market like that can be pretty tricky, but they actually have software and services now that can tell you (with pretty good accuracy) which stocks you should select. I've tried a lot of them but the best one I've used is called Trading Pro System. It's a service that gives you advice on which options are the most profitable, and whether you should buy, sell, hold, etc. It is run by a team of market experts using software to analyze the market. In my experience, it's been correct most of the time. If anyone's interested, here's a review: http://stockmarketsystems.org/wp/trading-pro-system/

[zmonkee]

if a republican president was in office right now, he would be getting crucified from the libs/dems-- Being that CURRENTLY, the market is doing well, and the economy is in the cr@pper-- they would be saying, "of course the republicans only care about and take care of the rich"-- Although, I have a feeling they would use some add'l 4-letter words--

However, I wouldn't get too used to these high numbers on the market-

[Ulgnud]

I suspect since the Stock market is largely inflated by speculators and there is little actual real value there, it is quite possible for it to rise while real America struggles. Oil isn't the only thing the speculators artificially inflate prices on.

[Uncle_D_Florida]

The Stock Market is allowed by Congress and regulators to be run by speculators so it does not have to really pay attention to the U.S.economy.
Banks can take huge risks with derivatives and other instruments of speculation and if any company crashes the U.s. taxpayer,thanks to Congress,will be theere to bail them out. Possibly after a few more huge financial crashes, they will have to go back to being more based on the economy.

[omnibus66]

The stock market is not a barometer of the economy. The stock market is the biggest casino in the world, and buying and selling are the wheels of the slot machine, with only the very rich being able to pull the handle. Any day all of the reels may come up jokers, and the whole thing will go up in smoke.

[payasyougo]

"Can the stock market rise while the economy stalls?"

It just depends on the level of QE.

[Jhihmoac]

"Can the stock market rise while the economy stalls?"

It rises and falls, like it always has in history...The extrememly wealthy still tend to lose and then make money in economic hard times...The show must go on...No coffee breaks...

[venusvegasvada]

I'm sure the Fed pumping 85 Billion per month into them doesn't have any effect at all.

[MaryWaterton]

The stock market didn't soar like this even in the late 1990's when the economy really was booming and there were more jobs than people to fill them. The stock market is soaring because the Federal Reserve is printing TRILLIONS of dollars and the Federal Government is borrowing and spending TRILLIONS of dollars. Common sense should tell you this is going to end badly. But this country has no common sense because God has given America over to a depraved mind (Romans 1).

[Mathion]

Let's try keeping scientifically discredited superstition and mythology out of it and be rational for a change.

The federal reserve is only doing what it's done for decades. Its effects are considerably less than the effects of cutting taxes for the wealthy and other GOP policies founded on the unworkable theory of supply-side economics (make sure the "job creators" have money and they'll hire people).

What's really happening is that the wealth moved from the poorest 80% of Americans to the richest 20% of Americans - to the tune of $40 trillion dollars over the last 33 years.

Stocks don't go up NECESSARILY due to demand or spending for the products or services of a business. They mostly go up due to the perceived demand for the stock itself. Though that is often tied to the bottom-up spending, the fact is, this time it isn't.

When you take $40 trillion dollars out of the hands of those who mostly spend their money (the poorest 80%) and into the hands of those who mostly INVEST their money (the richest 20%), money is shoved into business and then back to the investors in a kind of circle-jerk. Money from what spending is going on goes straight into the pockets of the investors - what little is actually being spent.

I also claim that the article is incorrect in the spending habits of the people because if the markets were responding to actual SPENDING, jobs would be created a lot faster than they are. Spending drives demand. People do not, in general, want to spend a lot because they don't see debt as a very good thing. Without reliable sources of income - whether through tax breaks or higher wages (handouts don't work) - spending is restricted.

This means the stock values are being artificially inflated by investors who are almost exclusively wealthy. The more money they put into a company's stocks, the more the stocks are worth and the higher the price goes. Those returns are paid back - when they're paid back - from other investments. It's pretty much a pyramid scheme since the money is NOT being put into creating new jobs (which is the cornerstone behind the "supply-side" economic theory). It it was, there would be all sorts of positions without waiting lists.

So consumer spending has considerably less effect than investment spending on the stock market today. It's a non-sustainable trend, of course. Money must circulate in a capitalist economy in order to ensure the economy stays healthy. Take 40 trillion dollars out of the economy by moving it from spending to investing and you have stagnation and eventual collapse of the economy. Money can't only mostly go from the bottom up as it has been for the last 33 years. Too little is coming back down to circulate up again.

This is based on firm, economic law. Not Bronze Age mythology. It's economics for those who can think. Not platitudes and simple-minded lies for those who can't. The difference is that by doing something about addressing the first, things will change for the better. Addressing the second will only make things worse.

[JoeSaver]

To MATHION (who said, "The federal reserve is only doing what it's done for decades"):

No, a quick look at the chart "St. Louis Adjusted Monetary Base" (google it) says otherwise.

The purpose of printing money is to transfer wealth from savers and retirees to banks and borrowers. TO ALL: Ask your elected officials in Congress what their position is on that, and let them know yours.