David Rosenberg, Chief Economist, Gluskin Sheff, says the market is pricing in 4.0% real return GDP for the coming year. He does not agree that this is attainable, and worse, its already baked in:
IS THE NEWS MAKING THE MARKET?
A market that needs rumours of yet another round of fiscal stimulus at a time when the budget deficit is 13% of GDP for sustenance is a market that is being driven by liquidity. But there were some various non-confirmations, such as (i) the bid in the Treasury market; (ii) lack of volume pickup on the NYSE; (iii) copper fell to a two-week low; (iv) CDS spreads, which measure credit default risk in North America, widened to four-week highs, and (v) John Deere cut its top-line sales estimate for the year to -21% from -19%. Moreover, we see that credit spreads have started to widen out a touch - by around 20bps for Baa and 65bps for high yield - in the past two weeks.
THE RECESSION IS DEAD, LONG LIVE THE RECESSION!
We can understand that there is a growing list of economists calling for the end to the recession, and that may or may not be the case actually, judging by the performance of all four ingredients that go into the NBER decision-making wheel. But let's be charitable and assume that the herd is correct this time around - a 49% rally from the lows and the degree of multiple expansion suggests that the S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is not our view, and even if it is attainable, guess what? It's priced in. Corporate bonds (and Treasuries too) are discounting around a 2.0% GDP trend, which looks more realistic.
Bottom line: The market is pricing in a much stronger recovery than is possible right now.
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