Capital-Goods Orders Point to U.S. Stock Drop: Chart of the Day

Falling orders for industrial machinery and other big-ticket items are signaling losses for U.S. stocks, according to Albert Edwards, a global strategist at Societe Generale SA.

As the CHART OF THE DAY shows, orders for capital goods other than aircraft have tended to track the Standard & Poor’s 500 Index during the past 15 years. Edwards included a similar chart in a report published yesterday.

Orders fell 8.3 percent in the first seven months of this year, according to data compiled by the Commerce Department. The S&P 500 added 9.7 percent during the period, which accounted for most of its 14 percent gain for the year through yesterday.

“It will not be long before the U.S. equity market reacts” to the decline in orders, a harbinger of the third recession since 2001, Edwards wrote. The chart shows the last two economic contractions.

Reductions in analysts’ earnings estimates are another warning sign, according to Edwards, who reiterated his stance that stocks are in a bear market that he calls “The Ice Age.” The average projection for companies worldwide slipped 2 percent in August, bringing this year’s decline to 15 percent, according to data cited in the report.

“High levels of investor hope” have lifted share prices as the profit outlook worsens, the London-based strategist wrote. “Investors must voluntarily give up hope” before the Ice Age ends, the report said.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net