Looking at the sales numbers so far gives a far less rosy picture than earnings, particularly when it comes to expectations (see data from Bloomberg shown below). The good news is that the Conference Board’s Leading Economic Index was up again today, and continues to imply improving economic growth and a pickup in sales at some point in this recovery. However, this common sense logic only works if the leading indicators function as well as they used to, given the current credit-constrained and deflationary environment (last I checked the velocity of money is not included in any of the leading indicators).
Let’s hope the leading indicators are still reliable, because after the rally we’ve experienced off the bottom, the market is no longer undervalued or oversold. In fact, it’s fair to say that on a short-term basis the market is very overbought. Momentum investors can certainly prop up markets temporarily, but they can also turn on a dime given the right catalyst. The bottom line is that we better see a pickup in sales sometime soon, otherwise a lack of organic growth may become the negative catalyst that causes a long overdue correction in the financial markets.
