By Tomi Kilgore at Marketwatch
Stocks and some economic data are diverging like they did before the last two recessions
Slide 1 of 8FactSet
Many chart watchers say the financial markets are always right. They believe markets move before trends in fundamental data change, because market prices reflect all the information that can be known to investors, in real time, while economic and earnings data are released with a lag.
With the S&P 500 SPX, -0.19% reaching an all-time intraday high for a second straight trading session on Tuesday, that would suggest the economy’s recent struggles, as depicted by disappointing fourth-quarter growth in gross domestic product, a sharp decline in retail sales and continued weak inflation readings, will eventually give way to improving growth. Read more about recent economic data.
But as the above chart, joined by the following charts, shows, investors often ignore disappointing economic information as a bull market progresses, just as they did before the previous two recessions. And when market prices just start building rapidly on themselves, without a strong economic platform or continued stimulus from the Federal Reserve, the market bubble that is created should eventually pop.
As the saying goes, there’s nothing as bullish as a fresh record, except the last one.
The above chart shows the S&P 500 can continue to climb while retail sales trend lower for a while, but eventually investors wake up.
Many commodities, such as copper and other industrial metals, are used in manufacturing and construction industries. Therefore, an overall decline in commodities prices can be viewed as a warning of lower demand, and therefore of a slowing global economy.
Investors aren’t heeding that warning — yet.
That means the opposite should also be true.
The above chart shows that the last time the stock market and corporate profits diverged, as they are now doing, was just before the previous recession and bear market.
The Federal Reserve said last month that inflation is expected to decline further in the near term, but then turn higher, as it believes the effect of lower energy prices should dissipate. But the above chart tracks inflation, measured by personal-consumption expenditures, excluding volatile food and energy prices.
So what happens if inflation doesn’t turn higher?
Slide 7 of 8
Does that mean the last record high is right around the corner?