Economists And Investing Pros Are Getting Nervous Amid The Deafening Silence

Once again, Friday ended with the stock market climbing to new all-time highs.

Even with last week's massive dump of lackluster economic data, volatility remained almost startlingly low.

It's worth noting that it's been a while since anyone has said anything about a debt crisis. Europe is cooling off and the U.S. is watching it's budget deficits improve.

This coming week will be relatively light for data. Perhaps, this will give experts some time to ponder the current risks to the markets and the economy.

Two big concerns of late are the rising risk of deflation and the stagnating earnings growth expectations. We will discuss each a bit more.

Top Stories

Bernanke Heads To Washington: On Wednesday morning, Federal Reserve Chairman Ben Bernanke will testify before the Joint Economic Committee to update us on his view of the state of the economy. Economists and investors alike will be looking for any clues that the Fed might begin to "taper" its aggressive monetary policy, which includes purchasing $85 billion worth of bonds every month to keep interest rates low. Later that afternoon at 2 p.m. EDT, the Fed will release the minutes of its last Federal Open Market Committee meeting.
No Inflation: "The big story this year is not the U.S. spending sequester, the China slowdown or the ongoing European recession," said Bank of America Merrill Lynch's Ethan Harris. "The big story is inflation, or more precisely, the lack thereof." Just this past week, the consumer price index came in below expectations. With concerns increasing of a Q2 economic soft patch, the real risk we may need to worry about is deflation.

Economic Calendar

Existing Home Sales (Wednesday): Economists estimate existing homes sales climbed to 5.00 million in April from 4.92 million in March. "With the pending home sales index gaining modestly in March and mortgage purchase applications lifting, we anticipate a pick-up of 1.4%," said Morgan Stanley's Vincent Reinhart.
New Home Sales (Thursday): Economists estimate new home sales climbed to 425,000 in April from 417,000 in March. "New home sales are a notoriously volatile series on a month-to-month basis. The trend is likely upward, however, judging by most other housing-related indicators," said UBS's Kevin Cummins. "We forecast a decent rise in the upcoming April report, consistent with the rising confidence about sales that homebuilders have reported and the rise in the mortgage purchase applications index."
Jobless Claims (Thursday): Economists are expecting claims to fall to 345,000 from 360,000 last week. "The trend is probably in between last week's 360k and the sub-300k readings in the prior two weeks," said High Frequency Economics' Jim O'Sullivan. "At 339k, the four week average is up just 1k from the recover-to-date low."
Durable Goods Orders (Friday): Durable goods orders are estimated to have risen 1.1% month-over-month in April. Excluding transportation, economists estimate orders climbed by 0.4%. "We expect durable goods to rebound in April, but as reflected in the ISM manufacturing and regional reports, growth will likely remain modest due to economic weakness overseas," said Wells Fargo's John Silvia. "Moreover, aircraft orders should also pick up as Boeing marginally increased orders in April."

Market Update

Analysts are quick to note that despite record high stock prices, earnings are also at record highs, which makes valuations much more reasonable than they were during the highs of 2000 and 2007.

However, earnings growth expectations have stagnated.

"I am troubled to see that forward earnings has been stuck around its record high of $115 for the past nine weeks," wrote market guru Ed Yardeni earlier this week. "This is the measure of earnings that I believe drives the market."

Hedge fund manager Felix Zulauf shares Yardeni's concern.

"The problem with currently rising equity markets is not rising prices but the lack of fundamental improvement," wrote Zulauf for Itau BBA. "Once equity markets discover the emperor has no clothes, they could face a quick and painful adjustment to bring markets in line again with fundamentals."

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