Why Has the Market Declined So Little Despite the Negativity? What’s Next?

In the face of the now-obvious negative outlook – the corrosive effect of deflation deleveraging, excessive debt, the softening U.S. and global economy, the “fiscal cliff”, the implausibility of a European solution, the probability of a hard landing in China and the prospect that corporate earnings estimates were far too high – the question we get most often is why the market has declined so little, and why it seems so resistant to bad news. In our view the reluctance of the market to give up much ground is typical of…. 

So say edited excerpts from an article* posted at www.comstockfunds.com

Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

The article goes on to say:

In our view the reluctance of the market to give up much ground is typical of many past market declines and reflects a state of denial by investors as they grasp at reasons to remain bullish. Currently, the reasons cited most often are that:

• the market is cheap,
• corporate earnings are strong and
• the Fed, as well as other central banks, will provide all the liquidity that’s needed to avert a serious economic downturn.

We believe that each of those evaluations is flawed.

1. The current earnings estimates for 2012 are unlikely to hold up and the market is not undervalued….

• The consensus estimate for S&P 500 operating earnings (even though we believe “reported earnings” is the more relevent) is about $104 for 2012 and $118 for 2013 but our estimate of trendline earnings is currently about $75, and, on this basis, the market is overvalued rather than undervalued.

2. Investors’ faith in the ability of central banks, including the Fed, to avert a serious downturn is ill advised.

• Global debt deleveraging and deflation will overwhelm any central bank attempts to prevent a serious downturn, particularly when we take into account that central banks have already used their best ammunition and have to rely on unconventional and untried measures with questionable chances of success.

3. In the last four major bear markets the decline started very slowly from the peak, and was interrupted by numerous rallies, but continued to gather steam, ending only after a scary waterfall decline toward the end.

• We suspect that the same pattern may happen this time around.

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*http://www.comstockfunds.com/ (To access the above article please copy the URL and paste it into your browser.)

Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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