December 29, 2015

Economic conditions appear to be weakening around the world

The main indices might look good, but so many groups have gotten schmeissed and the average stock is far off of its 2015 high.

Global economic growth is also wobbly. Here in America, third-quarter GDP reading of +2% followed a disappointing first half where growth failed to meet consensus expectations for the fourth year in a row. Fourth-quarter real GDP growth won't be much better, with housing activity and retail sales foundering in our supposed "oasis of prosperity."

Non-U.S. economic activity is worsening as well, led by the BRICs (Brazil, Russia, India and China), those former engines of worldwide growth. They're all "exporting" lower commodities prices, weakening economic growth and reduced corporate profits to America these days.

Despite this reality of slowing growth, optimism about our economic future are upbeat. The Federal Reserve forecasts four rate hikes, while the futures market is pricing in two or three.

But corporations don't share this optimism and instead continue to shave capital-spending plans even as they keep buying back their own shares (which is often only a simple offset to options issuance).

We're in an earnings recession, and I don't see a thing that brings us out of it.

If you're an optimist, I suggest you read the transcript of Tuesday's earnings call from Steelcase (SCS) , whose shares dropped some 20% that day. Compare CEO Dave Sylvester's remarks to that of the upbeat "dots" provided by our Federal Reserve.

"We've seen a reduction in large projects, both in terms of what we booked, but also as we look into the pipeline of future opportunities," Sylvester said. "We also see less of our overall business coming from our larger customers than in the past, and orders from our larger customers were down in the quarter. As we've discussed before, we probably have more of our business from large customers than the overall industry, so we are probably feeling the effect of the slowing economy a little earlier than others might."

"Second, orders in the second half of the quarter softened compared to the prior year, reflecting an apparent pullback in business from our corporate customers, as we did not receive the same level of year-end business we have experienced in the past couple of years," he continued. "We don't know the motive of each customer-purchasing decision at the end of the year, but we suspect that some of the recent economic uncertainty may have contributed to the pullback."

Meanwhile, technology stocks are holding up despite a drop-off in smart phones, personal computers, tablets, TVs and chips. But even Apple (AAPL) -- my largest short -- is beginning to feel the fallout of analysts lowering their earnings expectations and cutting price targets.

Elsewhere, there's new evidence of peaking conditions in autos and housing. We're also seeing peaks in venture funding and lower valuation, while IPO activity has been moribund.

All of the above conditions are a potentially toxic combination for stocks in 2016, as they're occurring at a time of above-average valuations.

Be forewarned: Mr. Market might be living on borrowed time.