Welcome to the Great Divergence

If you’re feeling whipsawed lately, there’s a good reason. Make that a lot of good reasons. Everywhere you look there seems to be an surplus of contradiction in economics and finance. The trend in consumption, for intance, is encouraging while income growth is slowing. Meanwhile, the labor market is showing signs of renewal recently just as the euro crisis threatens to deepen.

What does Mr. Market think? If we look at the widely watched mix of 50- and 200-day moving averages for the S&P 500, the signals are rather grim. For most of the past three months, the S&P has been trading under its 200-day moving average, a slump that continues at the moment. Additional discouragement comes by way of the 50-day average, which slipped under the 200-day average back in August with no sign of imminent change on the horizon. As any market technician will tell you, those are dark signals for the market outlook and perhaps the economy too.

But if the market’s telling us to beware, the trend in industrial production is sending a brighter message. The rolling one-year percentage increase in industrial production is 3.9% through last month—the best annual growth rate since April. Mr. Market, however, is distinctly unimpressed, even on a rolling 12-month basis through yesterday.

Industrial production’s strength is hardly an outlier. Retail sales, for instance, are bubbling higher these days. Meantime, the economy is expected to grow in the fourth quarter at its fastest pace in 18 months. And the Conference Board reported today that its leading economic indicator index (LEI) for October jumped sharply. “The October rebound of the LEI — largely due to the sharp pick-up in housing permits — suggests that the risk of an economic downturn has receded,” says Ataman Ozyildirim, an economist at The Conference Board.

Why isn’t the stock market reacting in kind? Perhaps the potential for deep trouble from the euro crisis is weighing on the crowd’s sentiment. Or maybe the threat of another government shut-down in the next phase of the U.S. budget debate is spooking investors.

Whatever the reason, it’s clear that we’re suffering from an excess of disconnects. True for the numbers, and true on the streets, as represented by the Occupy Wall Street protesters yesterday as they marched through New York’s financial district.

Welcome to the Great Divergence. A fair amount of encouraging good news (relatively speaking) is evident in recent economic reports. But there’s widespread debate about what it means for the economy. Heck, there’s at least 9% of the workforce that begs to differ when it comes to thinking positively.

This will go on until it doesn’t. There’s a head fake lurking out there somewhere. The question is whether we’re set to be disabused of pessimism or optimism? Depending on your perspective, you can make a compelling case for either side.

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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