Are our latest bubbles bursting?

Recent information and events of the first two weeks of April may have some ominous signs for our economic present, and future. This is true in both Wisconsin and nationwide.

If you pay attention to the numbers of Wall Street, you know that this month has not been a good one for stocks. The Dow Jones industrial average is down 500 points since April 1, and after a runup earlier last week, it dumped 266 points on Thursday and 143 more points on Friday. Now this could be just a correction after the Dow gained nearly 4,000 points from mid-November 2012 to the end of March 2014, but this article by Reuters via Yahoo Finance says there may be more to it.

First-quarter earnings estimates have fallen sharply as many companies have blamed the brutal winter for weak outlooks.

With high-valuation stocks under pressure, earnings could be subjected to even more investor scrutiny than usual.

"There's skepticism among investors about the outlook, and we're getting into the first-quarter earnings season, so you're going to see some positioning," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

Profit growth for Standard & Poor's 500 companies now is expected to have increased just 0.9 percent in the first quarter from a year ago, down from a January 1 forecast for 6.5 percent growth, Thomson Reuters data showed.

While a slowing in profits isn't a terrible thing in the real world (I'd argue that companies hoarding excessive profits over job and wage growth is one of the things that has kept a lid on the country's growth for the last 4 years), it also means that the big cocaine party stock market bubble we've had in the 2010s may be starting to pop. The same Reuters article notes that NASDAQ biotech companies have had price-to-earnings ratios of more than 34 to 1, which sounds a whole lot like the conditions that predated the dot-com bust of 2000-2001. Tellingly, the NASDAQ closed under 4,000 points on Friday, and is down over 8% in the 6 weeks and 6.5% in the last 10 days. If the NASDAQ drops another 5 points, it'll be at its lowest point since before Thanksgiving. With options expiring at the end of next week, it could be a quite interesting time on Wall Street.

And the other Fed-helped bubble in the States might also be deflating- this one in housing. Black Knight Financial Services does a monthly report on the amount of new mortgages, and last week they reported that new mortgages in February were at their lowest levels in at least 14 years. This is blamed on tighter lending standards, higher interest rates, and more people paying in cash to buy homes. But new home sales aren't hot either, as seasonally-adjusted sales for February were at their lowest levels in more than a year. Some of that may have been artificially low due to the polar vortex, but that doesn't mean it isn't going to eat into the real estate economy, and put pressure on coming months.

Wisconsin also had a dismal start to 2014 when it came to home sales, as the Wisconsin Realtors Association reported late last week. Home sales were down 11.5% for the 1st Quarter of 2014 vs. Q1 in 2013, and were closer to 2012's levels of 11,074 than 2013's 12,378. Again, this was an extraordinarily cold winter, but it's not like 2013 had record-warmth, especially with a miserable February and March, so you have to wonder if there's something more going on. When the Legislative Fiscal Bureau made its revenue estimates in January 2014, they based their estimates on home sales INCREASING by nearly 5%, and corporate profit growth being up closer to 6% than the 0.9% mentioned by Reuters. This rosy outlook led to the projected surpluses that led Scott Walker and the GOP-run Legislature to throw in additional tax cuts, but if these positive scenarios don't play out, it makes it much more likely that a deficit will appear, with less flexibility available to fix it.

That being said, job numbers are staying reasonably strong in the U.S. (albeit less so in Wisconsin), and I don't see the economy as a whole falling into recession. But there are definitely some warning signs of slowdown ahead, and unless things heat up with the Spring and Summer weather, the economy may not look as smooth as many were predicting when 2014 began. And that could trickle its way into a worsening fiscal picture for Fitzwalkerstan.