So Wells Fargo Chief Strategist, Jim Paulsen believes “Ebbing deflation fears, prospects for better earnings later this year and improving world economies are all reasons to believe U.S. stocks should climb”, according to a CNBC interview this past week.
But while all of those things sure sound positive, are they factually taking place or is Jim simply succumbing to the land of fairy tales and leprechauns otherwise known as media punditry. Well, as we always do, let’s take a look. Generally if fear of deflation is subsiding we would see this manifest through some increase off the historic low average global central banking rates. The following chart depicts the G13 nations average central bank rates (sourced from Bloomberg).
As you see the chart actually depicts steadily declining global central banking rates YoY, QoQ and MoM. So it’s clear if we judge action rather than words, deflation fears haven’t subsided and in fact are still increasing. In terms of earnings well let’s take a look at the quality of predictions.
And here we see that actual earnings (white line) falls short of estimates every time. So perhaps we should look to actual economic growth prospects set our level of optimism for forward earnings rather than the shoddy consensus estimates.
Maybe it just comes down to differences in what constitutes ‘Economies’ but very broadly speaking GDP and Employment should be pretty good indicators as to whether or not economies are improving or deteriorating. Let’s be very clear and not complicate things. When unemployment is rising it is indicative that economies are deteriorating, not improving. The following chart is the world unemployment rate (source: Bloomberg) and we can see that it bottomed out at the end of 2014 at 5.5% and is now sharply higher at 6.13%, having increased 4 of the last 5 quarters.
So it appears that the world, now including the US, is facing rising unemployment. This is surely not a sign that world economies are improving as Jim suggested.
But maybe he is referring to global GDP. Let’s have a look. The following chart is growth rate of global GDP (source: Bloomberg). Now remember, when GDP is falling it is indicative that economies are deteriorating. And so once again the data suggests that world economies are in fact deteriorating.
In the end, guys like Jim Paulsen are paid to be market cheerleaders. They are not paid to be honest. The facts are the facts. Stay focused and happy trading!