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For Clients & Friends

Dear clients and friends,

The long overdue market correction has finally arrived. And due to automated trading, volatility is extreme. Furthermore, it is likely that the volatility will last for a while. Here are the economic issues the market is fretting over:

  • Weakness in China – their currency devaluation is a clear sign that Chinese officials are worried about economic growth. That growth, by the way, is likely substantially lower than their 7% target;
  • The glut of oil is driving down prices and further impacting U.S. and worldwide oil industries (this isn’t all bad – see below); meanwhile, Obama’s Iran deal promises more supply as previously embargoed Iranian oil comes to market;
  • Deflationary pressures have intensified worldwide (fall in commodity prices); Emerging Market economies are tanking. Europe’s GDP growth, while positive, disappointed; Japan’s second quarter GDP was negative, and even Canada’s economy looks tipsy;
  • The ultimate worry is that all of the above will throw the world back into recession;
  • Marketwise, all of the technical indicators have been pierced.

So, how does all of this impact the U.S. economy?

  • Of all of the industrial nations, the U.S. is the least dependent on foreign trade; the U.S. is mainly a closed economy with exports a small part of GDP;
  • The strong dollar does have an impact on U.S. exports and on the industrial portion of the economy which has been flat (buoyed up mainly by strong domestic auto sales);
    • But the U.S. industrial economy is only 12-13% of U.S. GDP;
  • The U.S. service sector is doing very well; it is 9 times the size of the industrial sector;
    • Second quarter GDP is going to be revised up to 3% or higher;
    • Labor markets in the U.S. are at record levels of tightness by some measures;
    • Due to worldwide issues, inflation is very low;
    • The classic indicators of consumer confidence are booming including auto sales, restaurant sales, vacation themes, and tourism; U.S. consumer balance sheets are in the best shape of this century;
  • The glut of oil, while having a large negative impact on the energy sector, will continue to benefit U.S. consumers with lower gasoline prices being a much larger positive than the impact on the energy sector is a negative;
  • The fact that the Fed continues to think about a rate hike indicates that they believe the economy is strengthening. However, due to worldwide conditions, they would be wise to postpone the first rate hike from the September target date;
  • Bear markets only occur when a recession is imminent; there is concern of recession and deflation in other parts of the world, but one doesn’t appear imminent in the U.S.

Corrections are always time to buy. We haven’t had one for four years.

Industries that operate mainly in the U.S. (financials, consumer cyclical, healthcare, and homebuilders) are likely to be the least impacted by worldwide issues. And, it is hard to resist companies that have great balance sheets, cash, high levels of cash flows, growing sales, and rising dividends, especially when they go on sale.

We don’t know how severe this correction will be, but we do know that major bear markets do not occur without an imminent recession, which doesn’t appear to be on the horizon in the U.S.

If you have any concerns or wish to discuss items or issues, please call (775 284-7778).

Joshua Barone
Robert Barone, Ph.D.
Andrea Knapp Nolan
Nicoleta Tulai
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