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Will Good be Good Enough?

By | 2018, Money Moxie | No Comments

Confirmation Bias: The tendency to only accept the facts that support what we already believe.

By virtually every measurement, the U.S. economy is growing–and so it is in just about every other country in the world! That means that even though stock prices are near all-time highs, they are also supported by real economic growth.

The question is, “How long can the stock market continue to grow before cracks begin to form?” The answer: Small cracks are already appearing and most people don’t see them, yet.

How could corporations disappoint in such a good economy? No way . . . unless expectations are too high and investors realize this 3, 6, or 12 months from now.

That’s exactly what this graph is showing: an inability to exceed high expectations. And the market in 2018 is more likely to be affected by expectations than by economics. After all, the growth that everyone expects is already priced into the market. The bar has been set high for 2018!

The Federal Reserve has a new chairman, Jerome Powell, and he seems determined to get interest rates back to more normal levels. This makes borrowing money more expensive and could, at some point, have a negative impact on stocks.

Consumers could turn the tide in a negative way! Consumers represent 69 percent of economic growth. They have been driving growth upward for two years by spending more than they can afford. How long can this continue?

The savings rate, once at 10 percent, is now approaching an all-time low of 2 percent! The risk is not that Americans have overspent, but that they cannot continue to overspend in the next two years like they have in the last two years! How will American consumers continue to lift the American economy when they run out of money?

What will be the next crack in the economy? It will probably not be in housing this time. Mortgage debt seems low compared to 10 years ago and there is a shortage of homes around the country.

Any further cracks may be in credit card defaults. That’s one area we will be watching.

For now, economic growth looks solid. We will keep an eye on things because we know that investments become over-priced while the data is still positive. What we know is that 2018 is already more interesting than 2017!

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How Financially Disastrous Are Natural Disasters?

By | 2017, Money Moxie, Newsletter | No Comments

Since our last Money Moxie®, we have seen two massive hurricanes lash the U.S. coast. In spite of these and other risks, the stock market has continued to add to its 2017 gains. What’s going on? Is the market’s response rational?

Counting on rational behavior —or even reasonable behavior—from investors during a crisis could be costly. So, even if you don’t expect to be directly impacted by a hurricane or other disaster, you may still feel some financial fallout.

Gas Prices: Hurricane Harvey pushed gasoline futures up 10 percent in trading on the New York Mercantile Exchange as investors anticipated refineries would shut down. The increase soon spread. According to AAA, the national average rose from $2.35 to $2.66 a gallon—a 13 percent increase.

Employment: Economic suffering is also evident in employment. Following Hurricane Harvey, the Labor Department reported the largest one-week jump in initial jobless claims since superstorm Sandy. Two weeks after Sandy (2012) and Katrina (2005), jobless claims soared higher by 23 percent and 30 percent, respectively. So, the full impact of Hurricane Irma on this measurement is still coming.

Consumer Spending: Nearly 70 percent of the U.S. economy is driven by stable consumer spending. When gas prices rise nationally and employment falls locally, there is less money for discretionary spending. The city of Houston, for example, has nearly 3 million workers and contributes around $500 billion to the economy. (Internationally, that places Houston’s economic value above that of the entire country of Sweden.)

Destruction and Reconstruction: Destruction is not counted in economic output. It shows up only as falling wealth. Reconstruction, often financed by debt, will eventually have a large impact on growth and cause a bump for inflation.

The overall impact could subtract around one half of a percent from U.S. growth. Fast forward 6 months and there should be a boost that approximately evens things out.

Investors concerned with natural disasters would be wise to maintain perspective. The lasting impact will be evident in the higher debt and human costs. Ultimately, this impact on individual lives is the most devastating.

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Confidence is up, but will it lift the economy higher?

By | 2017, Money Moxie | No Comments

Looking at performance of the stock market over the last 12 months, one might assume that the economy is exploding upward. The rise has been driven mostly by a boost in consumer sentiment, which has taken off since the U.S. elections in November.

In 2017, consumer sentiment hit its highest level in more than 10 years!

Consumers represent 70 percent of the U.S. economy. Their confidence is crucial to future growth. Business spending is much smaller, but it is also much more volatile. So, when businesses are increasing their spending, the economy really has potential to move up. The good news is that optimism is also up for business executives.

Confidence data is nothing more than opinion polls. This is why they are referred to as soft data. Hard data represents real action. Typically, these go hand-in-hand: A change in one leads to a corresponding change in the other.

After inflation, consumer spending is up, but just by 2.8 percent.
The trend in the hard data does not match that of the soft data. The Federal Reserve does not seem concerned.

The Fed raised rates last December and March. Expectations are nearly 100 percent that it will raise them again in June–despite first quarter economic growth of 0.7 percent.

How does one reconcile the gap between opinion polls and actual improvement? What is likely to happen?

The U.S. economy is still improving. Unemployment is down to 4.4 percent. Corporate profits are up. Energy prices are down. Finally, global growth appears to be entering its first synchronized period of growth in two decades. According to BlackRock, European earnings are up nearly 20 percent in the last year.

Add to this good news the potential for positive surprises and it becomes more clear why a glass-is-half-full perspective is better.

  • Soft data could finally lift hard data
  • Increased global trade will help U.S. companies
  • Wages should rise with tight labor market
  • Deregulation could create more opportunities
  • Corporate tax reform may boost profits
  • Infrastructure spending could boost productivity

Any one of these surprises could help convert optimism into action. The timing is the greatest uncertainty, but that is no reason to be overly concerned. With so many positive economic changes occurring in the world right now, we believe there are plenty of opportunities
in 2017.

 

*Data from the Federal Reserve Bank of St. Louis. The S&P 500 index often represents the U.S. stock market. One cannot invest directly in an index. Investing involves risk, including potential loss of principal. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on market and other conditions, and should not be construed as a recommendation of any specific security or investment plan. SFS is not affiliated with any companies mentioned in this commentary.

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When Will Stocks Go Higher?

By | 2016, Money Moxie, Newsletter | No Comments

Stocks got off to a rough start in January and February as investors began to fear another recession. At the same time, consumers continued to keep the U.S. economy moving in the right direction. This divergence caused us to ask, which one is right? Are things getting better or worse? If the market is going to improve how strong will it be? Below is a list of what I think we need for stocks to move to new highs. Feel free to check the boxes if they become a reality.

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(1) Oil prices stabilize.
Investors need a dose of reality: low oil prices are good for the economy. Falling oil prices often follow, but do not lead to, recessions. What we need is for prices to stop declining so rapidly.

Oil is falling because the global supply is much
greater than demand. Even at these low prices, producers need to pump oil for cash. Fortunately, the decline is slowing. This is because demand and supply are getting close to a balanced level.

Global oil demand is at 96.5 million barrels/day and growing at 1.5%. Global supply is at 96.9 million barrels/day and is currently falling at a rate of -0.5%. This does not mean prices will move significantly higher, but they may stop falling.

With sanctions lifted, Iran could boost supply by 4 million barrels/day. Demand won’t grow fast enough to balance that much oil for a few years.

So, get used to low oil prices. They may be with us for a while–probably until several indebted producers cease oil production. At that point, oil prices could rise a little, fear over corporate debt should ease, and stocks will be more likely to climb.

(2) Political frontrunners emerge.
Who will be the next President of the United States? Investors are uncomfortable with this uncertainty, but they don’t have to wait until Election Day to feel better. With each election primary, the uncertainty diminishes.

(3) The Fed acknowledges global volatility.
What happened to “data dependence”? With its December rate hike the Federal Reserve announced that it intends to slowly raise rates in 2016 and 2017. It defined slowly as four rate hikes of 25 basis points each.

Rather than applaud transparency, investors have questioned the Fed’s determination.

Globally, central banks are doing the opposite: dropping rates to levels below zero in order to encourage risk taking, economic growth, and job creation.

(4) Evidence of consumer spending increases.
Will consumers continue to hold up this economy? The U.S. consumer represents 70% of the U.S. economy. China, on the other hand, represents approximately 2% of direct trade with the United States. That means that the consumer is 35 times more important.

Consumers are stronger than any time in the last 25 years. They are pocketing roughly $1,000 a year in energy savings. In 2015, spending increased 3% while purchases rose for autos (+5.8%) and homes (+7.5%).

With all of the good news about the consumer, the main concern is if these numbers are peaking. I think not. Unemployment is low (4.9%). Job postings are high (5.4 million). Wages and salaries increased by a reasonable and healthy level (+2.9%).

The final bit of good news on the consumer is that their debt-to-income levels are near their lowest point since the government started tracking them in 1981. That means there is still room for this 70% of the economy
to grow.

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