Market Insights

A lot of things can be said about the stock market right now. One of the biggest is its huge disconnect with the economy.

Judging by Wall Street, you’d think we’re in a recession now. Key indexes like the S&P 500 and Nasdaq-100 are in the midst of their worst quarters in a decade. Volatility and safe havens like gold and the Japanese yen have continued to climb. Economically sensitive sectors like industrial companies, retailers and transports have gotten smashed to pieces.

But then look at the economic numbers. Data as recent as November show not only U.S. factory activity faring better than expected, but the most manufacturing jobs added in eight months. (Less important regional indexes this month from the New York and Philadelphia branches of the Federal Reserve have been less impressive.)

Look at retail: MasterCard reported on Christmas that the U.S. just had its best holiday-shopping season since 2011. Other researchers, including pollsters at CNBC, University of Michigan economists, Deloitte consultants and the National Retail Federation have made similar observations in recent months.

On the transportation front, air and rail traffic have shown little sign of a slowdown. Still investors have shunned stocks across all those segments.

There are other disconnects when you look at the economic data. Initial jobless claims, one of the most closely following leading indicators, dropped more than expected last week and remain near long-term lows. Ditto for unemployment. Job openings, meanwhile, continue to outnumber people looking for work.

The last time stocks fell like this, back in late 2008, the same numbers were the polar opposite. Unemployment claims had been rising for several quarters and job openings were heading south. Pretty much everything then was truly bearish, while most things today are still positive.

Then why’s the market down so much? Many pundits obviously blame the Federal Reserve’s interest-rate hikes, but that’s something of a cop-out because stocks managed to advance in the face of tighter monetary policy all of last year and much of this year.

The bigger story, as cited repeatedly on Market Insights, has been a breakdown of traditional growth stories. Apple (AAPL) has saturated the market for iPhones. Netflix (NFLX) and Facebook (FB) have maxed out their customer bases for now. Chip sales are slowing after 15-20 months of torrid growth.

Meanwhile, profit margins have come under pressure. In addition to simple wage increases, other costs have emerged like FB hiring compliance officers, Amazon.com (AMZN) facing higher postal fees. Some recent mergers have proved less beneficial than hoped. Look at last week’s earnings reports from FedEx (FDX) and ConAgra (CAG) for examples of that.

There are other potential risks to margins. One has been the steady shift toward online commerce. On-demand shopping might be great for consumers but it deprives merchants of pricing power. The days of buying what you’re told, when you’re told, at the price you’re told, are over.

Secondly, the trade war with China threatens margins in several ways. Higher U.S. tariffs raise costs and threaten to reduce sales in the giant Asian country. Also remember management teams have spent years building China into their business models. A sudden reduction of that business means capital invested (which has a cost) will generate less profit.

So we’re talking about “paradigm shifts.” For a long time, business was done certain ways but now is changing. Companies committed to the older models have taken a hit and now investors will start to look for new winners. Some of the old leaders will obviously adapt or even be unaffected.

The good news for investors putting money to work is that overall valuations are cheap again by historic standards and economic fundamentals still point toward growth. Keep reading Market Insights in the New Year for a sense of which way sentiment is moving.