Corporate Profits Plunge! Biggest Drop since the Recession
In case you missed, the BEA ( Bureau of Economic Analysis) just realized it’s revised first quarter GDP report. It was a dismal -0.7 %. This means the US economy is shrinking, and it has been for over almost a year now.
Gross Domestic Product (GDP) is a measure of a countries economic output and prosperity. It looks at consumer spending, corporate profits, inventories, etc. of the entire country. You see, there are a lot of factors that go into the GDP number. So many in fact, it’s almost useless to use when making investment decisions.
The reason why, GDP was lower is more important to us as investors, than the number itself. The BEA found the reason for the decline was a dramatic fall in corporate earnings.
The drop in corporate earnings that the BEA recorded is what we need to focus on here. GDP counts corporate earnings and inventories. If a company makes a bunch of products, but doesn’t sell them, it’s still included in GDP. If this 106 billion inventories was removed from the GDP calculation, GDP would have been -3%!
Companies are producing products that no one wants to buy. The BEA includes these in their calculations to make things look better than they actually are.
Here is chart that illustrates the crash in corporate earnings in the first quarter.
All this bad news begs the question, reduce our risk and protect ourselves?
When it comes to the markets, stock prices are supposed to be driven by profits. The more money a company makes, the higher the companies stock should go.
That sounds pretty logical right?
Well the current market does not seem to think so. In the current stock market, corporate profits are plunging while the markets are hitting all time highs.
There are only two possible outcomes:
A) Corporate profits catch up to the market to justify the high prices
B) Corporate profits can’t catch up and market prices come down to more accurately reflect reality
Personally, I believe it’s going to be option B. We are seeing corporations have their worst earnings ever since the big crash of 2008.
Clearly the “road to recovery” the media has been touting to us the past 4 some years is a fantasy.
I am writing about this because I don’t want you to be fooled by the new highs of the market. We are officially in market bubble territory.
Every market bubble in history has ended the same way: 1929, 2001, 2008, ?. I’ve leaving a question mark for the next one that is forming as we speak.
It’s time to switch your focus from finding investments for today, to investments for tomorrow.
Here’s what I mean. I want you to “prep”.
No, not in the sense of stockpiling mountains of food and guns.
No, I’m talking about financially. Since we know the market is in a bubble, and will eventually crash we need to be ready for it. Being ready for it means not taking unnecessary risks.
The best way to profit from a bubble is after the carnage. After it crashes and burns. After the market drops 50% to 60%.
That’s when you strike.
You have to be ready to take advantage of the great wealth building opportunity we are all about to be presented with.
So you have to prep now and learn how to find great companies so you are ready to strike when the crash occurs.
Right now stocks are way, way over priced. When things crash, they will be way, way under priced.
You can over pay, or get a bargain. It’s your choice.