Outlook for the US Economy Improves & so does the Stock Market
Lance Spicer, Editor - Trident Confidential, 1 Sep 2011, 8:07 AM
Fed Chairman Ben Bernanke's comments last week at the Fed's annual retreat in Jackson Hole, Wyoming were not unexpected. His speech is actually on the one-year anniversary of the Bernanke's admission that the Fed would be embarking on its controversial quantitative easing (QE2) campaign, but this time nothing! The reason? In his view the US economy doesn’t need it, it will recover without intervention by the Fed.
As crazy as it may sound, I actually agree with him. Another round of Federal Reserve QE would firstly send a message that there is more wrong with the economy than there possibly is and it’s debateable that it would do much good anyway. Major US banks are in the best shape they have been for decade, corporate America is in great shape, US household debt is lower than in Australia (yes, much lower) due to the de-leveraging that’s gone on in the last few years.
The problem is confidence. Confidence by business to borrow money to expand, banks having the confidence to lend more freely, consumers having confidence to spend money. If confidence returns, hang on for the ride. Washington, and in particular, President Obama has been pretty useless in restoring confidence and needs to give himself an upper cut. How come when Bernanke speaks the market rises, Obama speaks the market plummets – he needs to sack his speechwriter, or something. Of course, our politicians are no better – although who wouldn’t mind listening to the dulcet tones of Julia Gillard all day? (that’s a joke by the way, so don’t email me :))
However, back to Ben Bernanke. This time around he basically told the US Congress to pick up their game saying that "most of the economic policies that support robust economic growth in the long run are outside the province of the central bank."
What the markets liked was that Bernanke was surprisingly upbeat about the US economy despite current weakness. He was very confident that strong hiring and growth will eventually return, but only if politicians take the right steps. He also went on to say that - "the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years."
So, why would he say all this positive stuff? Well, despite what some people say, he’s actually pretty smart, and he knows saying positive things is very beneficial, even if he’s being a tad optimistic. As for the US debt, a return to growth and inflation will slowly erode it’s percentage to GDP while the actual number may stay elevated for years or even decades. In saying what he said, Bernanke does have some economic data to back him up, which is really making a double dip recession less likely.
Here’s the latest data on the US economy:
- The US Commerce Department announced that July's durable goods orders rose by 4% to $201.45 billion, largely due to a booming transportation sector with vehicle manufacturers posting their biggest monthly gain in eight years. This trend is set to continue. This is significant because it is a major indicator of 3rd quarter GDP growth.
- A surge in factory orders indicated to investors that the manufacturing industry is still healthy. Factory orders rose 2.4 percent in July, the largest increase since March. Demand for cars jumped the most in eight years and orders for commercial airplanes soared. The report follows one that showed orders had fallen 0.8 percent in June. That caused worries that manufacturing, one of the best-performing areas of the US economy since the recession ended two years ago, might be starting to sputter. I never thought at any stage the US would slip back into recession and thought that Car and Plane orders would surge at some stage as replacement cycles come into play, as our stock purchases in these two industries attest. Some economists call it “mean-reversion” where eventually the long-term trend returns.
- While the US Commerce Department made its final revision to second-quarter GDP, lowering it to a 1% annual pace, down from its previous estimate of 1.3%, this was not a surprise due to a bigger-than-expected June trade deficit and inventory revisions. Downward revisions were mainly caused by slowdown in business inventories, which increased $40.6 billion instead of the $49.6 billion forecast; excluding inventories, the US economy grew at a 1.2% rate. Most economists are remaining fairly conservative with their GDP estimates for the second half of 2011 being around 2%, which obviously means you can’t have a recession with growth. What’s more, with recent falls in fuel prices and better retail figures as a result, that forecast growth may be actually revised higher and trade deficits revised lower.
- The University of Michigan/Reuters' bi-monthly consumer sentiment index rose slightly to 55.7 in August from a preliminary reading of 54.9. These numbers will probably get better going forward when you take into account that the sentiment index was at 63.7 back in July, just before all the nonsense took place in Washington.
So, I can see what Bernanke is seeing in the data and for the life of me, I can’t see how the US could fall into recession at this point, it doesn’t mean it can’t happen, politicians are capable of unravelling confidence further by just speaking, but it’s still looking like slow growth going forward.
Wall St had factored in around a 70% chance of recession as of Friday last week. If it doesn’t come, (as I suspect it won’t, because the data I’m reading must be very different from what other investors are reading), then expect a correction in the other (up) direction. I suspect the media, and “doom pushers” are largely responsible for the “crash” during August.
It’s often during the period July to September that corrections occur, it did last year, it did this year. It’s a fact of life. However, it always amazes me how some people completely unravel and suddenly think the world is ending and start having doubts about being invested in stocks etc. Usually by November the very same people will deny point blank having had any doubts at all. Their life is one huge roller coaster of emotions and that’s fine, but they have no place in the stock market.
If the stock market freaks you out, then decide whether you should be involved at all – but also remember whatever you do with your investment money after that point will probably return less, much less over the long term. I have been doing this for decades and I have watched people implode as their emotions get the better of them. They exit the market, usually during a period of heightened emotions (the bottom), and vow never to return. Some do (usually at the market top) and some never do. Both groups will never do well in the markets. They will often never achieve their financial goals because emotion weighs large in their investment decisions.
Investment decisions are often best done in a contrarian way – going against the grain. When there is blood on the streets – buy – when things are great – sell. To do the opposite is “financial suicide” but many people do. I have done well over the years, by having a set of trading rules and by buying companies that make sense and that are good businesses to own. I don’t really care what the market thinks about the valuation this week or next month, because next year I know I’ll be proven right. The fundamentals always win in the end 100% of the time. See www.tridentconfidential.com for more details on my system.
I also find it amazing that people tell me that I should change the way I do things, saying “you’re wrong this time”, “using protection strategies now is stupid”, “you’re stupid to be investing now, the market is going to crash further”. I’ve heard it all, and while I know these people are just venting their own emotion (i.e. Fear) and seeking my approval to justify how they feel about things, I can’t and won’t take it on board, because unless you think the end of the world is really going to happen, then things will always recover and get back to normal. It’s happened through depressions, world wars, and even credit crises. Basing you investing on a month-to-month basis where you swing from depression to elation quite frankly will see you dead before your time.
Investment whether it’s property, bonds or stocks is a long-term process and therefore takes time to mature. Taking a day-by-day approach will turn you inside out. Businesses don’t go from good to bad overnight, but watching the markets you would think they do. The stock market is irrelevant on a short-term basis because it reflects human emotion, not business fundamentals, but over the long term when you smooth out all the bumps the trend is up most of the time.
However, understanding market emotion and keeping a close eye on the fundamental economic information is also helpful as it allows you take advantage of buying opportunities and during the 15% fall in markets throughout August we did some judicious buying of Australian and US stocks and this resulted in a 12% increase in our portfolio instead of the average 6-8% fall most investors would have suffered by months end. It pays to get your timing right.
So, having said all that, in my contrarian way and now that there is less chance of a US recession looming – we have 4 fantastic new buys for subscribers this week to continue the re-stocking of our portfolio. The dramas are way from over I suspect, but I feel confident the low of early in August has now been retested and has come through ok and we should see solid improvement for the last part of the year.
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