I continue to maintain that the overall stock market has disconnected from any sort of fundamental reality quite a while ago. As the chart above suggests, a multitude of economic indicators are pointing lower, earnings and revenue guidance has been adjusted down as of late, baltic dry index is sitting at a 30-year low, etc… The question is…
Why is this divergence developing and what will the outcome be?
There are two possible scenarios. First, it is reasonable to assume that neither the economic data nor earnings will improve going forward. On the contrary. If that is the case it would be reasonable to assume that the stock market is setting some sort of a blow off top before reversing and catching up to reality.
The other possibility is, the stock market might already be pricing in the next round of QE. That’s right. As outlandish as it sounds, it would confirm my overall thesis that the US is on the verge of a massive recession and that the FED will have a very difficult time raising interest rates in this environment. This would explain the divergence.
Unfortunately, for the stock market the outcome is singular as it would have to correct in a major way. The two scenarios described above impact the timing, but not the ultimate outcome.
Is The Stock Market Already Pricing In The Next Round Of QE? Google