Index Apr13.pngTraders in Western financial markets are confident of 3 key facts about the economic outlook:

• The US is already recovering, with auto and housing markets returning to pre-2008 levels
• The Eurozone crisis is almost resolved and recovery is expected by H2
• China’s new leadership will ensure its growth surprises on the upside

Thus, as this month’s Boom/Gloom Index shows, the S&P 500 has reached a new record level.

The problem is that we have been here before – in fact, twice before. The first was in March 2000, when the S&P hit a then record closing high of 1527: the second record was in September 2007 when it closed at 1565. On both occasions, investors’ confidence proved completely wrong as markets and the global economy then tumbled instead.

This might be 3rd time lucky, of course. But as the Wall Street Journal (WSJ) notes, companies are extremely cautious on the outlook. 86 have already issued negative guidance on earnings. This is also following an earlier pattern. In Q3 2007, the ratio of negative to positive guidance hit a record 2.38 ahead of the downturn. As Q1 2013 ended, the ratio set a new record of 3.58.

This caution is supported by new Bureau of Labor Statistics data, which shows US median household income has fallen 5.6% since June 2009 to $51,404. Instead, the benefit of the central banks’ liquidity programmes such as QE2/QE3 has gone to the top 10% of the population. The other 90% have seen their incomes fall. Yesterday’s unemployment data was also weak.

Meanwhile in Europe, the jobless rate hit a record high of 12% in February for the Eurozone, and was 10.9% for the European Union. 26 million were without work, and labour markets have now declined for 22 months. Equally China’s new leadership seems more concerned with bursting the property bubble than stimulating growth. New rules banning multiple home ownership for single people have just been announced in Beijing and Shanghai.

The traders comfort themselves they are climbing ‘a wall of worry’. But as the WSJ warns “Watch out. There may be a nasty drop on the other side of this wall“. Central banks have financed this rally, on the basis that rising stock markets will boost consumer confidence and lead to economic recovery. But they tried the same policy prior to both 2000 and 2007, and the results were awful.