The S&P 500 continues to flirt with 2007’s all-time closing high, and some investors may be making money hand over fist. However, the consumer says something smells fishy. So based on what the latest economic indicators are telling us, are the numbers on the big board just an illusion? Walter Zimmermann, chief technical analyst at ICAP-United says what we’re seeing is just a bullish extravagance and points out the “real” market has been in a down trend since the Internet bubble burst…ditto for Dow.
Zimmermann says the stock market is not inflation adjusted, while economic indicators are. To truly analyze the market and make your next investment move, you should apply the Producer Price Index (PPI) to extract the real from the nominal. S&P 500 divided by PPI equals an inflation adjusted market, or in this case, a huge bubble of inflation.
In a way, consumers knew this already. Consumers are paying higher food and gas prices, while being faced with tight credit and job insecurity. Zimmermann says this can be seen in the University of Michigan Sentiment data. It’s been on a downward trend since 1999.
What’s the takeaway in this sad reality? Use caution when investing. Even though, as Zimmermann says, it’s easier to be comforted by a bullish illusion rather than the bother of a bearish reality, you can play it safe by investing in bonds…for now.
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- Walter Zimmermann