Tags: Bowyer | stocks | bonds | stagnation

Economist Jerry Bowyer: Stock Market Is Sending a Warning Signal About Economy

By John Morgan   |   Wednesday, 10 Apr 2013 08:11 AM

The stock market is forecasting economic stagnation rather than boom times, according to Forbes columnist and economist Jerry Bowyer.

Bowyer said a distressing flurry of recent economic statistics, including the Institute for Supply Management and jobs growth, undercut reasons to be bullish.

“Furthermore, it’s hard for anyone who writes or speaks from any principled free-market perspective to square optimism with the current policy environment which is unusually hostile to markets.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

Growth matters for stocks, Bowyer wrote for Forbes, but the valuation of stocks relative to bonds matters more.

In general, stock yields need to be sufficiently higher than bond yields are to compensate stock investors for the risk of future earnings shortfalls, he noted.

The U.S. equity yield premium for stocks versus bonds now stands at almost 5 percent, Bowyer said. This is “much closer to the historic maximum than it is the historic average, which is a little less than 1 percent.”

“This means that the current market valuations are anticipating a time of low growth.”

According to Bowyer, the U.S. stock market is currently forecasting an economic growth rate over the next few years of about 1 percent.

“America is in a period of economic stagnation, and will be for some time,” he stated

Nicholas Perna, economic adviser to Webster Financial and managing director of consulting firm Perna Associates, said he does not see big upside for stocks at this point.

“We’ve had a really good run-up in earnings since the bottom of the recession and a bigger run-up in the stock market, but I think looking ahead, if you count an outlook of modest economic growth in 2013, it’s hard to see rapid growth in earnings,” Perna told the Journal Inquirer of Manchester, Conn.

“If you couple that with fairly stable low interest rates, it’s hard to see large increases in price-earnings ratios and stock prices.”

Perna said there is a possibility that financial turmoil in Europe could drag the U.S. economy back down.

“If Europe plunges into a deep recession with major financial system problems, then it’s hard to see equity markets in the U.S. doing well, raising the specter of another global financial crisis.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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