Is The Economic Recovery Real?

economySasha Cekerevac: You know, it’s funny; with the stock market hitting all-time highs and market sentiment becoming ever more bullish, you would think that the economic recovery both here in America and globally was right on track.

But you’d be wrong. The economic recovery is not accelerating globally, and here in America, we just witnessed a minor bump up in growth primarily led by a build-up in inventory.

Ask the average person on the street: do they feel as if the economic recovery is running full speed ahead? Do most Americans feel better today than they did last year?

I’m willing to bet that most people don’t feel that much different about the economic situation than they did a year ago. Yet stock market sentiment has gone from highly pessimistic to overly optimistic. After all, we are at all-time highs; doesn’t that mean that the economic recovery is close at hand?

Not necessarily. I believe much of the upward move in the stock market (and market sentiment) this year has been primarily fueled by the Federal Reserve’s easy money.

Look, most people have a short-term memory. They don’t tend to remember the longer historical picture. Instead, they see what has worked over the past couple of months and continue doing the same thing over and over again until they get burned.

Market sentiment began building up in the middle of 2012, and once investors realized that the Federal Reserve had its foot on the accelerator, people piled into the market. This has kept pushing market sentiment ever higher, regardless of whether or not the economic recovery was accelerating.

This one chart is a great example of the difference between stock market sentiment and the underlying strength of the global economic recovery.

S&P 500 Large Cap Chart

 Chart courtesy of www.StockCharts.com

This chart, going back to 2007, comprises the S&P 500 (NYSEARCA:SPY) (red and black line) and the price of copper (solid black line).

Market sentiment in commodities can be quite erratic, as you can see in the above chart by the price of copper, which moved extensively up and down. But generally speaking, both the price of copper and the S&P 500 tend to move in a similar direction.

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