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4/15/2013

So far the stimulative effects from driving stocks higher to spur economic growth have been muted to put it mildly.

You’ve all seen the euphoria over the performance of the US equity markets, as the major indexes have posted about 10% gains so far in 2013. And it’s all because the economy  is recovering nicely, which should bode well for corporate earnings as the massive increase in the demand for jobs will enhance everyone’s consumptive capacity.  Well, if you’re one of our loyal followers you would clearly sense the sarcasm in that last sentence.

The reality of the matter is that unfortunately stimulative policy has stooped to using appreciation in equity prices as means to spur economic growth by enhancing the wealth effect of consumers (e.g.  higher net worth from rising stock prices should get consumers to spend more on goods and services).  However, the grand plan is sputtering at best.  When examining economic data over the past few weeks, it is apparent that the wealth effect or at least the pace of consumption from rising stocks is muted at best.

Last week posted weaker than expected Retail Sales. Consumer confidence levels having been dropping precipitously and some of the more heavy-hitter indexes such as the ISM have been illustrating weakness as well.  Oops, almost forgot that tremendous pace of job creation which was simply pathetic as depicted by last month’s report.  On the flip side, the cheerleaders site such numbers as strong durable goods and an improved housing sector.  If you think housing is that much improved just check the market and you’ll probably see that the price of your house hasn’t increased at all since last year…so be careful of the hype….perhaps some bottom picking going on in housing activity.

Pushing stocks higher to spur economic growth…forget about it.  Good sound policy is that which provides the stimulus to the creation of long term, high quality job creation.  Playing games with asset prices may provide some short term capital gains for a few but eventually we’ve all seen what happens….and it’s not pretty.

On the positive side of things, it’s finally getting warmer in the Northeast.

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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