It appears that the summer has not been kind to the equity markets, and that we have actually been in a “stealth” correction for about 3 months.
What should investors do? Is this a correction to flee? Is it already too late?
Part of the reason for the acceleration in the heretofore “stealth” correction to the larger-cap equities this past week is a souring of public sentiment over the seeming nonchalance of the government’s response to both ISIS and to the threat of an Ebola outbreak now that we have our first confirmed case in the U.S.
The consumer confidence index plunged to 86.0 in September after rising throughout the spring and summer to 93.4 in August. Note that the survey was taken before the report of the Ebola patient in Dallas on Tuesday of last week, so, today, sentiment is likely even lower.
Back to the investment question. If one looks only at the underlying economic picture, the U.S. economy is among the world’s elite few displaying significant economic growth. Real GDP growth in the second quarter was 4.6 percent, a growth rate not seen for many years, and estimates for the quarter just ended are in the
3 percent to 3.5 percent range.
So, it appears that finally, after five years, the economy is firing on all cylinders. Whether or not the Ebola scare or ISIS derails the economy remains to be seen. Below is an analysis of the economy’s major components:
The Labor Market: Net new job creation has been stellar, and as alluded to by President Barack Obama on Thursday, job openings have been at cyclical highs, layoffs at cyclical lows, the quit rate is up and initial jobless claims are below 300,000 per week, lower than in the last boom.
Housing: The latest data have been mixed, with existing-home sales disappointing but new-home sales skyrocketing. The flat existing-home sales report is partly due to the withdrawal from the market of the all-cash investor. This is really a good omen. A flat reading actually means that the “normal” buyers are stepping up.
First-time buyers are still lower, as a percent of total, than “normal,” but job creation in the 25-34 age cohort has been good, which should translate into a higher percentage of first-timers. In addition, recent research has concluded that the millennials aspire to homeownership much like older generations, but have been delayed because of the recession and are forming households later in life.
Production: Production and capacity utilization continue at cycle highs. The reports from business surveys show that both manufacturing and nonmanufacturing indexes are hot. Just look at vehicle production and sales.
Consumers: Contrary to media hype, the consumer is in good shape. Their debt/income ratio is at 1999 levels. (Note: total debt/income is still at 2007 levels due to the record deficits of the federal government since the recession, but the consumer ratio is much improved.) As a result, we have seen rising credit card spending and record new-vehicle sales.
In addition, the fall in gas prices, because of reduced world demand coupled with rapidly rising supplies, is very consumer-friendly. For every penny reduction in price, consumers reap $1 billion in savings. Most of this is spent on other goods and services.
Interest Rates: The Fed’s September communique was very dovish, meaning that there is no imminent worry about interest rates suddenly rising. Weak economies in the rest of the world also conspire to keep rates low as foreign central banks continue their money-printing ways, which adds liquidity to the world’s equity and debt markets, with the U.S. financial system being the major recipient.
The answer to the question of what to do about this correction appears to be to hold or buy if you were wise enough to have accumulated some cash. This is based on the economic fundamentals in the U.S., as large and long-term downdrafts in equity prices only occur when a recession is imminent, and the data indicates that no such recession is yet in sight.
Of course, this is not a guarantee. Outside events, like the rapid spread of the Ebola virus, a terrorist attack, or something completely unforeseen can rattle markets, can cause sell-offs and even bring on a recession. You should consult your investment adviser about your own situation.
Robert Barone (Ph.D., Economics, Georgetown University) is a Principal of Universal Value Advisors (UVA), Reno, NV, a Registered Investment Advisor. Dr. Barone is a former Director of the Federal Home Loan Bank of San Francisco, and is currently a Director of AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Company where he chairs the Investment Committee. Robert is available to discuss client investment needs. Call him at (775) 284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of the company, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.