A couple more indications that the economy remains in dire straits
Www.chartoftheday.com is a free service that emails subscribers a daily chart covering some aspect of the financial markets. About a week ago, the daily chart showed the decline in earnings per share of the S&P 500 Index. What that chart shows is so significant it should probably be labeled as the chart of the century, rather than just the chart of the day.
Below is the chart to which I refer.
As the notation on the chart explains, in the past 20 months, earnings per share for the S&P 500 have declined by more than 90%–something that has never occurred before. As you can see, the chart goes back to 1935 during the midst of the Great Depression. At no time has there been another drop even close to the magnitude of the current event.
A few analysts and economists are now saying that the recession is over or that the worst part of this economic crisis has passed. This chart alone would seem to provide evidence that the worst might be just beginning. It will be difficult if not impossible for the stock market or the economy to sustain an advance if the companies that make up the S&P 500 have no significant earnings.
What can we reasonably expect in the coming months if there is a recovery? I’m not certain. But based on this chart, a move back to $21 per share–about the level experienced when I was born in 1957–would represent three times the current earnings level. Again based on this chart, similar moves occurred after World War II, in the 1990s, and from 2003-2008.
Another interesting bit of information that came to my attention this week was an article from Bloomberg.com about insider selling. According to the report, in the first three weeks of April, executives at NYSE-listed companies sold $8.32 worth of stock for every $1 of stock they purchased. That is the fastest rate of selling since October 2007, the peak prior to the start of the bear market that wiped out about half of the market value of U.S. companies.
On Wall Street, these insiders are often referred to as “smart money.” That is a reference to the fact that because of their positions they have access to information that ordinary investors do not. The implication of this recent insider selling is that perhaps they know something we don’t and if they believe this is a good time to head for the exits, perhaps we should be following.
According to the same article, the rally that began in mid-March is the steepest since the 1930s. So perhaps the insiders merely recognize that such a sharp advance is highly unusual and represents a good opportunity to cash in before a retracement.
For weeks we have maintained that market risk has risen right along with stock prices and is now at an unusually overbought level. Last week and this week we have seen some evidence that the current advance might be faltering. June tends to be one of the weakest months of the year for stocks, so we will soon know if this year will follow that pattern.
We hope you all have an enjoyable Memorial Day holiday.
F.S.