Tag

economic growth

Doomed For Recession?

By | 2019, Money Moxie, Newsletter | No Comments

Why the yield curve is an accurate and less useful indicator

Economic growth has been slowing, and bond yields have been falling. Now, the yield curve–the difference between long and short interest rates–has turned negative . . . an ominous sign that a U.S. recession may follow. Are we doomed?

History has shown that the yield curve does act as a warning sign for trouble ahead, but it is possible that a recession is still a year or two away. In the meantime, investments have typically done all right.

However, some investors have already thrown in the towel. They moved out of stocks. All this money must find a home, and that home in 2019 has been cash. I believe this to be a mistake.

The bright spot right now is the financial health of U.S. consumers. Representing 69 percent of the economy, consumers have less debt than they did prior to other recessions. Plus, the job market is still extremely healthy.

The greatest threat is falling manufacturing–a global problem that the trade war is making worse.

The Federal Reserve may not have the tools to fight this war. After all, rates are really low. So, will lowering them more make much difference? If the Federal Reserve can make a difference, then it is worth noting that money is cheap right now and likely to get cheaper.

Usually, the Fed raises rates even after the yield curve inverts. These rate hikes have preceded each of the last six recessions. That’s 100 percent of the time.

This year is different. Not only will the Fed avoid raising rates after the inversion, but it already lowered rates before the curve even inverted. The Fed has never acted faster. It is extremely flexible to the markets in 2019. And, as the famous investor Martin Zweig advised, “Don’t fight the Fed.”

*Research by SFS. Investing involves risk, including potential loss of principal. S&P 500 time period chosen to display sample of timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. 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 upon changing conditions. This is not a recommendation to purchase any type of investment.

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Bull Market Turns 10!

By | 2019, Money Moxie, Newsletter | No Comments

How a Lesson from 2009 Could Help You in 2019

Ten years ago, the stock market and the economy were in disarray. These were dark financial days for most investors and most Americans.

By March 1, 2009, the Dow Jones index had fallen over 50 percent from its high (from over 14,000 to nearly 6,500). One advisor asked me what would happen if it dropped another 50 percent. His faith in a turnaround was being tested. It turned out that the Dow did continue to slide lower, but for just one more week and the loss was not another 50 percent, but only 3 percent.

A client called to close her account. She was fortunate because she had invested conservatively and had actually made money since the crisis began. She didn’t care. She was petrified–wanted zero risk. She sold out. That was March 2, 2009. Exactly 7 days later, the market hit bottom.

The client and advisor missed out. The S&P 500 has increased 305 percent since its low in 2009, and that doesn’t even include dividends. As we have stated many times,

“If you want to see the sunshine, you have to weather the storm.”
–Frank Lane

December 2018 provided the same lesson with less drama. This time, investors really seemed to be acting irrationally. The market fell around 19 percent in a very short amount of time. Sentiment surveys at CNN Money and the American Association of Individual Investors were recording record lows.

However, our indicators at SFS were not flashing a crimson red. In December 2018, those that focus on employment and consumers (70 percent of the economy) looked strong. Low energy prices also seemed good.

What about the sentiment indicators? Using the emotions of investors as a signal is not very reliable. These emotions can change quickly, so they cannot signal what is likely to happen in the coming year or years. They are also a better indicator of what not to do, which means we had another reason to be optimistic.

In short, we absolutely believed the market would reverse course and move higher. For all our investors that weathered the storm, the sun did shine again and brightly.

Where do we go from here? I said last December that things were not as bad as they seemed. Now I am telling investors that things are not as good as they may look.

With evidence of slow growth, the Federal Reserve will stop tapping the breaks on the economy. Plus, there is plenty of cash that left the stock market in the fourth quarter that has not returned to the markets, yet. Both are reasons to not give up hope for a positive 2019.

The S&P 500 is often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results.

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Just In Case You Missed It

By | 2018, Executive Message, Money Moxie, Newsletter | No Comments

Dear Financial Partners and Friends!

How is the U.S. economy really doing? Here are a few quotes and facts regarding the past, the present, and the future.

The Past: “We Ran Out of Words to Describe How Good the Jobs Numbers Are,” (“The Upshot,” Neil Irwin, The New York Times, June 1, 2018.)

The Present: The U.S. economy jumped to an annualized rate of 4.1 percent GDP in the second quarter of 2018. That’s almost double the first quarter’s rate of 2.2 percent. This is the fastest rate of growth since 2014. This is great news for all of us!

The Future: The following quotes are from Elizabeth MacDonald’s, “Evening Edit,” Fox Business News, July 19, 2018. MacDonald said,“(Here are) CEO commitments for more jobs over the next 5 years.”

FedEx®: “FedEx® will train or reskill 512,000 people over the next 5 years.”

General Motors®: “General Motors® is proud to offer 10,975 workforce training opportunities.”

The Home Depot®: “The Home Depot® is pleased to provide enhanced training and opportunities for 50,000 associates.”

Raytheon®: “Tom Kennedy from Raytheon® and we pledge 39,000 enhanced career opportunities.”

The U.S. economy is doing well. As a result, most Americans are doing well. Remember this: Your financial success is our passion and our mission at Smedley Financial.

Best Wishes,

Roger M. Smedley, CFP®
CEO

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Trade Helps Make America Great

By | 2018, Money Moxie, Newsletter | No Comments

Harley Davidson®, the iconic American motorcycle company, plans to close a Kansas City factory and lay off 800 workers. It will consolidate operations and open a factory in Europe. This surprising announcement came despite actions meant to support U.S. manufacturing and jobs. It is an unintended consequence and casualty of our current trade war.

Trade promotes global peace, grows our economy, and brings greater opportunity to the greatest number of people. The United States has experienced huge benefits over the last century because of increased trade, and Americans want to continue to compete fairly in the global economy. No matter how tough the trade talk, Americans should want more trade, not less.

The trade war is a tactic for negotiating better agreements. Hopefully, we get there soon because we are only beginning to see the effects and the uncertainty.

Don’t Let A Trade War Become A War On Trade
One of the greatest risks the United States has taken is to raise tariffs on so many countries at the same time. This year, the United States has raised tariffs on China, India, Mexico, Canada, and members of the European Union. These have reciprocated U.S. action and have quietly been making better agreements with each other.

China created the Asia Pacific Trade Agreement and as of July 1, it lowered tariffs on approximately 10,000 goods coming from trade partners, including South Korea, India, and other regional countries. China is considering similar agreements with Mexico, Canada, Brazil, and Europe. Japan recently signed its own “free-trade” agreement with the European Union.

The forceful approach could backfire just as it has in the case of Harley Davidson® and Whirlpool®. Farmers, for example, are also feeling the pinch. With fewer international buyers, the value of many crops has fallen. They have been offered a bailout, but seem more interested in farming than handouts.

Can We Emerge As Winners?
The United States is engaging in a risky tactic in order to obtain something quite reasonable: fair trade and protection of our intellectual property.

To make it happen, we need to start winning by focusing on more friendly trade partners. The more good agreements we get, the easier it will be to get the final countries to negotiate a fair deal.

Trade allows Americans to focus on what we do best. This specialization allows for higher innovation and new technologies. It leads to less expensive food and better prices on items that we want. Specialization also makes us more productive so that we can earn more working. All of this translates into a higher standard of living for most Americans and a more peaceful society.

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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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Finding a Way to Boost Economic Growth

By | 2017, Newsletter, Viewpoint | No Comments

When Donald Trump was running for president, he promised Americans a huge increase in economic growth reaching 4, 5, and even 6 percent. However, real economic growth in 2017 is expected to be around 2.1 percent–equaling the average over the last 10 years.2 Boosting growth will require overcoming challenges and capitalizing on opportunities. 1

 

 

 

(1) David Payne, “Goldilocks GDP Growth: Not Too Hot, Not Too Cold,” Kiplinger, July 28, 2017.
(2) Federal Reserve Bank of St. Louis.
(3) Nick Timiraos and Andrew Tangel, “Can Trump Deliver 3% Growth? Stubborn Realities Stand in the Way,” WSJ, May 15, 2017.
(4) Glenn Kessler, “Do 10,000 Baby Boomers Retire Every Day?,” The Washington Post, July 24, 2014.
(5) Amanda Dixon, “The Average Retirement Age in Every State in 2016,” Fox News, December 28, 2016.

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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Powerful Performance

By | 2014, Money Moxie, Newsletter, Viewpoint | No Comments

Economic growth in the United States was slow last year as the federal government dropped one potential bomb after another. However, none of these exploded and U.S. stocks had their best year since 1997. With all this positive momentum would it be too much to ask for an encore?

In January we escaped a close call with the fiscal cliff. Then came sequestration. By May, Ben Bernanke had dropped another bomb: tapering. Before the end of 2013 we endured a government shutdown.

Duds

Interest rates shot up last year with fear the Federal Reserve (Fed) would slow its bond-buying program. In 2014, this action is slated to become a reality.

Each month the Fed plans to slow its purchases by $10 billion. As it does, let’s keep in mind that any purchase is extra stimulus to the economy. The Fed is still flooding the economy with money. Some may compare this to pushing on a string, but the last few years have helped validate the phrase “Don’t fight the Fed!”

As the Fed becomes less involved as a driver of economic growth we may see more ups and downs in the stock market. In all likelihood, the coming year will be more volatile than last year.
When the next drop comes, let’s keep in mind that it is perfectly normal even in a healthy market to have some hiccups. A fall of 10 percent in stock markets occurs on average about once a year. These drops can even be healthy for long-term growth.

According to the Wall Street Journal, strategists believed the economy would slowly improve and the market would rise 8.2 percent in 2013. It rose 30.
This year, the economy is expected to grow faster, but predictions for stocks are more moderate.

The driving forces of growth should be similar. Domestic energy production is still rising. The housing recovery is underway. Employment is improving. Wages are expected to rise and changes in consumer spending are trending in a positive direction.

Improving economic growth does not necessarily mean more stellar stock returns. Sometimes the two can be out of sync as investors look to the future for something to get excited about. Nevertheless, stocks and the economy are closely related and the economy is still heading in the right direction for now.

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