As I read the news and watch the markets, I’m struck by the yawning difference between what’s going on with the economy and what is happening with equities.

I know the worn out arguments.

People are buying stocks because they don’t have many choices. That’s fair, to some extent. The return on stocks (dividends, expected earnings growth) is higher than the interest paid on bonds.

Then there’s this one: Foreign investors moving to U.S. dollar-denominated holdings are driving up prices.

And my favorite: Stocks will keep going up because… they’ve been going up. I’m not sure how that makes sense, but I guess it follows some thread of logic.

There is some truth in each of these, but we need to keep one overriding factor in mind.

For years the silver lining has been growth in the equity markets. Every time we’ve discussed weakness in other parts of the economy, someone has always yelled: “But look at the markets!”

Clearly it’s true. Many people have made tidy sums over the past six years through investments… even if their paychecks have remained modest.

However, the silver lining is always in contrast to the cloud, and in recent years it seems as if people have forgotten the cloud exists. Not only is it still with us, but it’s growing more ominous by the day.

First quarter gross domestic product (GDP) was just released. For the first three months of the year, the U.S. economy grew at an annual rate of 0.2%. Note that this is the annual rate. The actual rate for just the quarter (one fourth of the year) was 0.05%, which is about as close to zero as you can get and still be positive.
This level of growth comes on the heels of our Fed printing almost $4 trillion, our mortgage agencies allowing home loans with a mere 3% down while conforming mortgage rates sit below 4%, and new car loans charging less than 3% interest.

With so many forces propelling the economy forward, we should be growing at 3% to 4% per year, not struggling to understand why we’re sitting close to zero. And yet, here we are, looking forward to another year of subpar growth — and it’s nothing new.