The Hope Trade Returns Though Severely Stunted As It Should Be

by Jeffrey P. Snider
Alhambra Partners

All it takes are the words “record high” and all economic or financial sins are forgiven and forgotten. The financial media cannot contain themselves whenever they get the chance to use the term, adding qualifications like “soar” and “sharply” to make sure everyone gets the message. Context need not apply because stocks are supposed to be forward-looking discounting mechanisms.

However, even a small bit of background dispels the sentiment. Dating back to especially QE3, the stock market had been trading on only the economy that “will be” not the growth environment that actually was. We know that given the behavior in prices as they diverged sharply with actual earnings, all on the premise that forward earnings were solid and reasonable based on QE actually working. That was already a somewhat shaky premise in 2013, but by the middle of 2014 it was increasingly negated. Where $140 in EPS for the S&P 500 was expected in CY2015, only $86 occurred.

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