One piece of data that has notoriously been missing from all financial publications is the precipitous decline in corporate earnings as compared to previous recessions. The speed and depth of this decline surpassed that of even the great depression with over 90% of corporate earnings disappearing in about 2 years. It appears that the decline has bottomed out, but most of that has been due to the quick resolve of corporations in cutting capacity and costs along with strong government intervention. At current levels of earnings, the P/E multiple can only be rationalized with the expectation that earnings will snap back quickly as the economy rebounds. I think we all need to keep an eye on the consumer because 10% unemployment and high levels of household debt will continue to stifle any rebound in corporate profits.
Another arena to watch closely is government spending. For better or worse, fiscal stimulus has been the breath of life in 2009 and there will be an 80% government contribution to world GDP growth in 2010. It is estimated that US GDP would have contracted at a 6% annual rate during the second quarter without government intervention. More public outrage over federal spending is going to have a definite impact on the prospect of future stimulus plans which will create a strong downdraft for an equity market that has already priced in 3%+ real GDP growth.
Since the bottoming of the equity market in March the US has lost about 2.5 million jobs, nearly the same number of cumulative jobs lost during the 2001-2003 tech implosion. Good signs indeed.