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In the red zone

Money | Markets react to government interventions but recession fears remain

Issue: "School choice," Aug. 25, 2012

Feeble second-quarter-earnings reports poured out of Wall Street in July and early August. In the midst of earnings season, the Commerce Department announced that the gross domestic product (GDP) grew at an annual rate of just 1.5 percent, less than last year's 1.8 percent growth. First-quarter growth was a barely better 2 percent, and both numbers make a mockery of White House predictions earlier this year of 3 percent growth.

Even Apple, a Wall Street darling, disappointed this quarter. Apple is far from moribund. Revenue rose 23 percent to $35 billion, and the company earned a massive $8.8 billion-but both numbers fell short of expectations. That caused Apple and the entire technology sector to drop.

Then a strange thing happened. In the week following Apple's announcement, the Dow went up 500 points and Apple rebounded. So why are earnings playing so little role in the movements of the market? In part, says Rusty Leonard of Stewardship Partners, because short-term speculators and "government interventions," including the "double whammy" of both a Fed and a European Central Bank intervention on Aug. 1 and 2, have overwhelmed normal market forces. One result: Publicly traded corporations continue to sit on trillions of dollars they are afraid to invest, further retarding economic growth. Their balance sheets and share prices may remain temporarily strong, but the economy continues to slide downward. That's a condition that can't last indefinitely, and the shift may come soon: September is historically the worst month for the stock market.

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Jim Pethokoukis of the American Enterprise Institute has looked at data from the Federal Reserve going back to 1947. He says when year-over-year real GDP growth falls below 2 percent, recession follows within a year 70 percent of the time. He also says that for the past three years, the White House has consistently overestimated the impact of its "interventions." "In August of 2009, the White House-after having a half year to view the economy and its $800 billion stimulus response-predicted that GDP would rise 4.3 percent in 2011, followed by 4.3 percent growth in 2012," Pethokoukis said. All of these numbers were way off, and even with downward revisions every year since, GDP growth has not come close to White House projections.

"The U.S. economy remains in the Recession Red Zone," he concludes. That fact will have a significant influence on the fall election and on share prices in the months to come.

Super-size spending

Associated Press

Thanks to political action committees (PACs) and so-called "super-PACs," the 2012 presidential election campaigns have already surpassed the record-high amount of $515 million spent on advertising four years ago. With the election now less than 100 days away and still up for grabs, the spending figures will likely accelerate through October. Advertising Age magazine said in March that $9.8 billion would be spent on advertising by all campaigns in this election cycle, but that estimate now appears to be low.

Porter Bibb, managing partner of MediaTech Capital Partners, believes media companies will be flush with cash as a result of the campaign spending. He says third-quarter earnings for Comcast, News Corp, and CBS could approach records, though he said the "big winners are local television." In Charlotte, N.C., for example, television spending by the presidential candidates approaches $2 million a week. In Charlotte and other markets in battleground states, advertising slots between now and the election are virtually sold out. - Warren Cole Smith

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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