It is often difficult to determine why the markets rise or fall based on either good or bad economic news. Sometimes markets fall on good economic news and sometimes markets rise when poor economic data is reported. Recently, the market has seemingly defied logic over the past few weeks by rising in the face of poor economic data. The recent rise can probably be attributed to the fact that earnings (for the most part) are meeting or beating expectations. While main street is still hampered by job losses, it is a boon for corporate profits.
As of yesterday, roughly 80% of reporting companies have beat earnings estimates, but only approximately 65% have been beating top-line revenue growth estimates. In other words, companies are making their numbers by continuing to cut costs. This outcome is not how to build a foundation for solid long term growth and is likely not good news for longer term earnings growth (beyond next quarter).
Jacob Hacker of Yale recently presented a study sponsored by Yale University in conjunction with the Rockefeller Foundation on economic security and income. The study argues that in the past year, one in five households suffered income losses greater than 25%. It typically takes several years for households to recoup the lost income. In addition, household budgets are stretched and have little in savings.
So while the markets rise in the face of good earnings (remember, markets will follow earnings, not the economy), these results are unfortunately coming at the cost of future consumption which still constitutes roughly 70% of GDP.
