Thursday, October 16, 2014

U.S. relative economic strength provides little solace near term

The U.S. economy is on pace to have GDP growth of around 2.5% in 2014, the jobless claims numbers reported this morning are the lowest in 14 years, energy price declines are putting more money in consumer's pockets, and while wage gains are low, the unemployment rate is at its lowest since 2008.  Walmart lowered its sales forecast yesterday, but that change may be as much due to stiffer competition online than a projected decline in economic activity.  It must be remembered that the holiday season is sacrosanct to many Americans, and ways will be found to make the necessary spending.

Earlier this week we were out at several stores doing some shopping for the winter season.  There was reasonable activity everywhere, and any comparison to the palpable gloomy mood in stores in 2008 and 2009 was non-existent.  The great majority of American consumers are not invested in any substantial direct way in what happens in the stock or bond markets.  As long as people have jobs, any type of job as long as it is reliable, they will spend money in December and earlier as they plan.

Any suggestion that the stock market went into this market decline being substantially overvalued is generally viewed as incorrect.  Any new cracks in the foundation of credit in this country are not visible, as both companies and consumers have deleveraged in recent years.  Getting a mortgage is not easy and credit for small businesses has not been any kind of hand out.

All of the above suggests that the U.S. economy is in substantially better shape than that of Europe   which could actually be flirting with deflation in certain regions.  Growth is stalled there, and with China's economic growth decelerating at a faster pace than previously expected and Japan once again on the ropes of no growth despite Abe's earlier more progressive efforts, the global economy is not expanding.  Emerging markets, once seen as the essential long term growth element of any portfolio, are not playing that role.

The U.S. cannot for a minute isolate itself from a global economic slowdown.  It is looked at as the one country that can pull the world out of this market slide, but the U.S. would do well just to pull itself out of this in the coming days.  One could think that it will, as money seeking safety and return from around the world should gravitate toward the U.S. market with its relatively greater transparency, reasonable valuations, and an appreciating currency.  For now though, the U.S. may need to hit that 10% correction threshold before the selling subsides, and values become too compelling.

With variables such the ISIS advance in the Middle East, the continuing friction with Russia and its bordering countries, notably of course Ukraine, the turmoil in Hong Kong, and with all eyes on the ebola threat, there are issues that make a pure financial analysis of this downturn incomplete.  The coming days and weeks will obviously provide a clearer picture.

From this perspective, the near term should provide some relief to the U.S. market.

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