S&P 500 Index: Stocks Priced To Perfection; Is A Sell-Off In The Works?

buyers and sellersSasha Cekerevac: One of the more common economic topics to be discussed recently has been the possibility of a global economic recovery. The lack of job creation is not only a problem for America, but it’s also a problem globally. The economic recovery has been extremely slow for many parts of the world, leading to an international void in job creation.

Recent data have offered contradictory information regarding the possibility of a global economic recovery. But what worries me is that after so many years following the Great Recession and after trillions of dollars in monetary stimulus, the world still cannot achieve an economic recovery, and millions remain unemployed due to a lack of job creation.

Recent data from France show that industrial production fell far more in January than was expected. Expectations for France’s industrial production in January estimated a 0.2% drop; yet it came in at -1.2% from December, according to Insee, France’s national statistics office. (Source: Deen, M. and Riecher, S., “French industrial output tumbles as recession looms,”Bloomberg Businessweek, March 11, 2013.)

For the three months ended January 31, 2012, factory output fell by 4.6% in France. This is a serious decline, and it clearly shows a lack of economic growth. Job creation is nowhere in sight, as unemployment in France was 10.6% in the fourth quarter—a 13-year high.

Why does this matter for Americans?

Of course, America is not France; however, recent policy decisions here worry me tremendously. In fact, it’s the lack of policy decisions that worry me. Washington is quick to raise taxes, as were the French, yet they can’t make structural reforms that can help develop a long-term economic recovery.

As we all know, or should know, job creation stems from the private sector. For an economic recovery to take hold, we need to stimulate private enterprises to expand their businesses, naturally leading to job creation.

France shows us that raising taxes and putting onerous restrictions on businesses results in a reduction of job creation possibilities.

Does this matter for your investments?

Yes, because the current market level is pricing in an economic recovery in the second half of 2013 and 2014. This economic recovery that is supposed to lead to job creation could be in jeopardy because of the ineptitude of politicians in Washington.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

Above is a monthly chart of the S&P 500 Index (INDEXSP:.INX) spanning back to 1997. Clearly, the current market is pricing in a substantial economic recovery. However, I believe we are entering a dangerous phase in the market.

Unfortunately, this depends a lot on Washington. With the lack of negotiation occurring between politicians, there is the possibility that Washington will put a large damper on any potential for an economic recovery and job creation.

With the S&P 500 within striking distance of its all-time highs, the question to ask is whether or not the economic recovery is for real.

While there are early signs that there might potentially be an improvement, considering the state of global economic recovery and the lack of job creation on an international scale, this could put a damper on American firms.

While U.S. corporations are in great shape financially, it will take a significant increase in earnings to justify a continued upward move in the stock market. Until we see several consecutive months showing hard data that the economic recovery is sustainable and job creation is resuming at an accelerating pace, I would look to take profits out of the stock market, as the market could suffer a serious sell-off if the economy starts to decline.

This article is brought to you courtesy of Sasha Cekerevac from Investment Contrarians.

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