Markman Capital Insight

How to make sense of surging stock indexes and Wall Street pessimism

The big event this week has been the release of the April 29 Fed meeting minutes.  The April statement acknowledged the rollover in Q1 earnings data which has since only worsened, with Wall Street estimates for Q1 GDP falling below -1%. The minutes were  scoured for clues as to how confident the Fed is that the slowdown is merely temporary.

Friday's report on consumer inflation will also provide visibility on the likelihood of a Fed rate hike in September.

Michelle Meyer at Bank of America Merrill Lynch is looking for Q1 GDP to come in at-1.2% and the Q2 bounceback limited to 2.5% -- implying 0.7% growth for the first half of 2015.

It's a stunning setback for a domestic economy that many experts believed to be ready to rumble only six months ago. Such is the consequence of the drags of the stronger dollar and the crude oil collapse earlier this year. No wonder the U.S. market is stumbling around with a low single digit return this year.

What about consumers? Here's an excerpt from Meyer's recent note to clients:

"With a windfall of cash from lower gasoline prices, consumers are either being cautious, choosing to add a large portion to savings, or there is a longer lag to spending than we had expected. It could also be that consumers have learned from the crisis and have become more conservative about utilizing their wealth gains and managing debt."

With a June rate hike already virtually off the table, a move in September is suddenly looking a lot less likely. Once the Fed squirms and admits as much, bulls expect that stocks should be able to make a clean break up and away from the 18,000 level on the Dow, the level first tested in December.

Yet one always has to wonder whether the narrative of "weaker GDP, delayed rate hike, higher stocks" eventually hits a wall. That wall is the legitimate concern that at some point, bad news is just bad news, particularly when it involves both disinterested consumers and fearful executives that are clearly willing to hold off on capital expenditures.

Still, you know our theory is that you can forget almost all the other metrics and just look at the inflation rate as a guide to future market advancement. Low inflation allows price/earnings multiples to rise, giving stocks a boost even if earnings growth is subpar.

Bottom line: So far this year neither bulls nor bears have covered themselves in glory, but bulls have the upper hand. They need to prove they are in charge by turbo-boosting stocks to clear new highs above recent resistance this week. If they show any hesitation, bears will crash the party one more time and send the indexes back for another test of the recent lows. Stay frosty.

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