Originally published on RGJ.com’s website http://www.rgj.com/story/money/business/2014/11/30/robert-barone-invest-confidence/19655523/
If an economist from the 1970s, ’80s or ’90s were to have time traveled forward to today, and that economist were to look at the macroeconomic environment, he/she would conclude that, despite the negativity of the media, the U.S. economy is actually doing well.
• Third quarter real GDP growth was 3.9 percent with second quarter at 4.6 percent. This would be considered about normal growth for a healthy economy by that time traveler. (But, in today’s world, this is high growth, as it is the best two consecutive quarters of growth since 2003.)
• The unemployment rate, at 5.8 percent, while not great, was typical for the ’70s, ’80s and ’90s. (The October 5.8 percent rate compares quite favorably to the 7.2 percent rate of October 2013, and shows how strong the U.S. labor markets have been over this past year.)
• The unemployment rate, at 5.8 percent, while not great, was typical for the ’70s, ’80s and ’90s. (The October 5.8 percent rate compares quite favorably to the 7.2 percent rate of October 2013, and shows how strong the U.S. labor markets have been over this past year.)
• The four-week moving average of initial claims for unemployment (moving average used because the weekly number is very volatile) have been below 300,000 for 12 weeks in a row. In the housing boom era (’06), this measure was below 300,000 for only seven weeks. We have to go back to the dot.com boom in the late ’90s for a longer run. But, besides that period, initial claims have rarely been below 300,000 since the early ’70s, so the time traveling economist would be duly impressed.
• Industrial indexes are doing well. Today’s diffusion indexes (ISM Manufacturing = 59.0, Non-Manufacturing = 57.1, and a Philly Fed Index of 40.8, a 10-year high and more consistent with a real GDP growth rate of closer to 7 percent than 4 percent) show strength seen only a few times since 1980.
• Leading indicators (LEI) rose significantly in October and in eight of the nine past months. This bodes well for continued economic expansion, and would be noted by the time traveler.
• Our guest economist would not relate to the price of oil at $75/bbl as being cheap, as oil prices (West Texas Intermediate Crude) never got above $40/bbl until 2004. Nevertheless, oil did fall from $39.53/bbl to $19.28 from September 1990 to February 1991, a fall of more than 50 percent, so the current fall from $106 to $75 (a nearly 30 percent decline) is not without precedent from past eras. (The biggest decline occurred from June ’08, $139.96, to January ’09, $41.73, a 70 percent decline.) The fact that the price of gasoline is now firmly below $3/gallon, which shifts billions of dollars from the non-discretionary to discretionary section of a household’s budget, bodes well for holiday spending. Our economist would so note this trend.
No recession in sight
Given this data and comparing it to past eras, that economist would have to conclude that there is no recession in the foreseeable future. One thing that is readily apparent to our guest and to any economist in the investment business is that major downdrafts in equities are almost always accompanied by an impending recession (1987 is the exception, but the ensuing recovery in prices was rapid). Each and every post World War II cycle reinforces this concept. And, while today’s U.S. equity markets look to be high priced from an historical perspective, when compared to alternatives, U.S. equities are still the world’s most attractive market.
Foreign money printing impacts U.S. equities
These markets will continue to be attractive as long as foreign central banks continue to print money. That newly printed money is used to weaken the currency of the printing central bank (e.g. Japan) by buying dollars in the foreign exchange market with the newly printed currency (yen). The purchased dollars are from the cumulative pool of U.S. deficits over the past 20 years that now serve to lubricate world trade (which is done mainly in dollars). That pool of dollars, by the way, does not directly impact today’s U.S. economy. Those dollars float around the world serving as the world’s reserve currency and facilitating international trade.
The newly purchased dollars by the foreign central bank find their way back to the U.S. capital markets (and eventually, a significant amount finds its way into U.S. equities) because the foreign central bank doesn’t want to hold a sterile asset. When they purchase U.S. assets (Treasury securities or other assets), part of that cumulative pool of dollars is now repatriated and become part of the U.S. money supply. In effect, this mechanism is analogous to the Fed continuing QE, but it happens without the Fed lifting a finger. And it is this phenomenon that will keep our equity markets buoyed until the foreign central banks begin their own “taper.”
Have you been buying the dips?
In this column, published in the RGJ on Dec. 30, my forecasts for GDP, manufacturing and trade, the labor markets, housing, and capital spending were upbeat, even in the face of a lot of bearishness. The result was a forecast for rising equity prices in 2014 and that investors should “buy the dips.” Hope some of you took that advice. The near term outlook has still not changed. We’ve recently had a dip, and those bold enough to buy have been handsomely rewarded. For 2015, as the economy continues its expansion, the best investment advice will be to pick the right sectors. But regardless of whether you can do that, you should be a player. Consult your financial adviser for investments that fit your risk profile.
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.
