The Real Reason Stocks Keep Rising [News Report]

by Avinash Saxena

“It’s earnings, Stupid” a bullish investor is currently shouting from his rooftop. Ever so right he is. But what really is the driving force behind this latest surge in equity prices?

Last I checked, a madman despot is holding oil prices hostage (not to mention hundreds of thousands of innocent civilians). Those oil prices, along with an ever-higher grocery bill, are now taking up 22% of the average American’s spending budget. For good measure, over one-fourth of Americans’ homes are “underwater” (the mortgage is larger than the home is actually worth). Not surprisingly, roughly 15% of Americans are now on food stamps, and over 15% remain “underemployed” (unemployed, involuntarily working only part-time, or so despondent that they are out of the labor force).

My stock portfolio, on the other hand, is doing just fine, thank you. Who cares about the fiscal debauchery of the PIIGS (Portugal, Ireland, Italy, Greece and Spain)? Who cares about the out-of-control level of U.S. Debt? Who cares about the rampant level of inflation in emerging markets and the fact that many central banks are raising interest rates and imposing capital controls which will slow down their economic growth rates? Who cares about the social unrest throughout the Middle East and North Africa?

Well, with gold trading at over $1,500 per ounce (and the price of silver and some soft commodities moving up even faster), apparently the traders in the Chicago pits have taken notice. But not the U.S equity market, with the VIX (the Volatility Index, a measure gauging future anticipated stock market volatility) trading at an astonishingly low level. Truly eye-opening.

The answer, my friends, is not blowing in the wind. It’s earnings. Plain and simple. Albeit early in this latest array of quarterly earnings reports, 81% of the 124 companies so far to report earnings from the S&P 500 Index and 71% of the 188 companies in the MCSI World Index have reported earnings per share figures that have beaten the consensus analysts’ estimates. Indeed, profits of those 188 companies reporting to-date in the MSCI World Index have beaten forecasts by nearly 9%! What gives?

Oddly enough, bad news is actually good news. You see, U.S. productivity, which is a measure of employee output per hour, is now increasing at an unusually high rate of 4%, the fastest pace since leaving the depressed recession of 2002. And what causes this thrust in productivity? Better technology? A more streamlined approach to organizational management? Highly efficient, just-in-time inventories clicking along? Perhaps a bit of each of these elements helps to answer this quandary, but there is one overriding factor to the corporate earnings momentum: the lack of wage pressures on businesses.

That is, what’s really driving productivity growth, and hence earnings growth, and hence stock market appreciation, is the fact that wages as a percentage of revenues keep falling!

That’s right. America’s pain is also the stock market’s gain. Labor costs fell 1.5% in 2010 (they also dropped 1.6% in 2009). No wonder corporate profits have meaningfully beaten consensus analyst estimates for 8 consecutive quarters. Corporations haven’t experienced this much good fortune (at the expense of the average American’s poor fortune) since 1962-1963.

So while the headlines bombard us with depressing news, stocks are “climbing a wall of worry” ever so steadily higher. In this case, climbing on the back of America’s employees who are shouldering the burden to graciously accept a day’s wage, thankful that they aren’t out of work like one of their friends, neighbors or relatives. Go figure.

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