February 27, 2015

Fed is causing markets to rise

I remain surprised that the market continues to be accepting and forgiving of disappointing top- and bottom-line corporate sales and profit growth, which has, as its lead, sub-par domestic and worldwide economic growth. Failed consensus expectations of self-sustaining growth has, arguably, still not reached "escape velocity," as real GDP growth in the U.S. has averaged only about 2.4% growth a year over each of the last three years.

"Outside influences" have replaced healthier nominal GDP growth as a catalyst to expansion of earnings a share. Per-share profits have been buoyed by "financial engineering" -- a continued reduction in companies' fixed-cost basis coupled with aggressive buybacks, fueled by a zero interest rate policy backdrop.

I had thought that corporate share buybacks and a lean management policy (ingredients for a lower quality of earnings) would be re-agents to lower price earnings multiples, not higher price-earnings ratios. The response by investors has almost been nonchalant. 

What shocks me is how readily most investors have accepted this sharp drop in expectations; judging by the steady rise in the U.S. stock market, they have barely blinked! 

It remains my view that central bankers' showering of liquidity has played a much more important role than many believe in the market, and valuation has climbed since the generational low in March 2009.