Call me Pollyanna, but I’m more sanguine on the global economy than most right now. Here’s a grab bag of positives our team at Fisher Investments came up with that aren’t being widely considered in my view:
U.S. Census Bureau – RETAIL SALES INCLUDING FOOD SERVICES
U.S. Bureau of Labor Statistics (BLS)
U.S. Bureau of Labor Statistics (BLS)
The Conference Board, Inc
U.S. Department of the Treasury
U.S. Department of the TreasuryFederal Reserve, United States
U.S. Bureau of Economic Analysis (BEA)
These two headlines from Bloomberg, of course, are being mostly hailed this week as bearish indicators:
- European Economic Confidence Falls Most Since December 2008
- Consumer Confidence in U.S. Falls to Lowest Since April 2009
The irony! The 12 month periods after December ’08 and especially April ’09 marked one of the best times in stock market history to be invested. Simply, and this has pretty much always been true, sentiment numbers of all stripes tend to be at best coincident indicators, but are usually slightly lagging. That is, they have virtually no forward predictive power for the economy or stock market.
Readers of this blog know I have a long-standing beef with folks who believe we’ve been through an “era of deregulation” starting with Reagan/Thatcher, and ending ostensibly with George W. Bush’s presidency. I find this unfathomable, and earlier this year asked if there are any studies that proved such a statement.
Well, we have some evidence. Todd Bliman (a consistently excellent columnist over at Fisher Investments Marketminder.com) told me about this study: Susan Dudley and Melinda Warren from The George Washington University and Washington University in St. Louis recently published a report on US Regulators’ budgets. The simple reality is that, just about any which way you slice it, regulation has been increasing over the decades. In fact, from 1980 to 2012 regulation spending has more than doubled.
Check out the full report here.
Alan Blinder’s recent Op Ed in the WSJ puts his views on the S&P downgrade of US debt about as bluntly and correctly as one can:
Yes, S&P is now telling investors that lending to the U.S. government today is riskier than (it said) lending to Enron was in August 2001, or than buying any one of thousands of soon-to-be-toxic mortgage-related securities was in 2007. If you listen to such advice, you deserve what you get….But many frightened investors moved their money straight into what they still know is the world’s safest asset: U.S. Treasurys. Treasury yields fell across the board—not exactly what you expect from a downgrade. In practice, S&P downgraded itself.
A Tale of Two Downgrades — Alan Blinder
But on his second point, the Fed’s “downgrade” of the US economy (it lowered its outlook last week), a few quibbles.
First, almost like every other widely published economic survey, the Fed’s economic models tend to blow in the wind. Note that, through most of the last couple years, as the economy beat expectations, the Fed’s expectations increased. And then when numbers started coming in weaker recently, they lowered expectations. This is what a behaviorist might call the “trend continuation bias”.
Just as importantly, though, is the Fed’s unique language that it would explicitly keep short rates very low through mid 2013. Blinder believes this is a bizarre attempt to give confidence to markets and the broader economy.
Bizarre, absolutely. (For one thing, keeping the risk-free rate for money at distortedly low levels for prolonged periods isn’t ideal, nor does it inspire confidence.) But I don’t think it’s just about the economy. There’s an ulterior motive: politics. Let’s see, what happens in the next couple years? Oh yes! Bernanke’s boss, the guy who can reappoint him, is up for reelection! By signaling publicly and in no uncertain terms that rates will be accommodative the next two years (theoretically propping up the economy), Bernanke is trying to hold on to his job.
In the modern era of the Fed (which in my view starts more or less with Volker), it’s an increasingly less independent and more political institution. This is more evidence.
For all the soft economic data of late, and there’s been plenty, it’s particularly interesting to see July’s US Industrial Production number come in so strongly—not just higher than expected, but the fastest growth of the year. Additionally, June’s IP was revised up. This, of course, partly reflects a rebound from Japan-related supply constraints (auto & light-duty truck production rose 10.4% m/m), but also possibly a general reacceleration, as already very lean inventories can’t wait long to be restocked. Only time will tell, but this was an encouraging report.
Source: Federal Reserve
I’ve always bristled at what the media calls “The Consumer.” I get this image in my head of one giant consumer, 50 stories tall if he’s a foot, roaming the countryside, consuming everything in sight, throwing all the goods and services of the world down his giant gaping maw!
I think it bothers me most because I don’t tend to think of consumers as an entity so much as I think of them as a collection of individuals. (This distinction, in my mind, is perhaps the definitive dichotomy of supply versus demand side economics.)
Anyway, our staff at Fisher Investments has come up with a few nifty charts tied to US consumers and their current status. Not as shabby as we generally read in the mass media!
First, the stubbornly high US unemployment rate has not stopped personal savings and disposable income from growing. A savings rate of over 5% is well above average, causing consumers’ lot to improve with every payday, to the point where current aggregate cash of $8 trillion is nearly 30% higher than just five years ago. Moreover, annual disposable income growth of nearly 4% is trending right around its 10 year moving average.
US Personal Savings Rate and Disposable Income
Source: Thomson Reuters 08/2011
Second, consumption and consumer credit have a pretty strong relationship over time, but following the panic of 2008 the relationship broke. While consumption patterns picked back up rather quickly (and incidentally is at a new all time high!), borrowing habits were pressured as consumers and lenders deleveraged their balance sheets. Now that banks are starting to lend again, credit growth has reemerged and is becoming readily available to fund future spending.
Exhibit 4: US Personal Consumption and Consumer Credit Annual Growth
Source: Thomson Reuters
Exhibit 5: Senior Loan Officer Lending Survey: Consumer Underwriting Trends
Source: Federal Reserve
With lower aggregate leverage, higher cash balances, positive income trends and lenders beginning to lend, it doesn’t look like consumers are down for the count.
As mentioned on this blog before, Lara Hoffmans (co-writer of several NYT bestsellers with Ken Fisher and managing editor at MarketMinder.com), is a mad capitalist genius. She’s also a great writer and a tremendous wit. Now she’s writing forForbes. Check out her first article here:
S&P Temper Tantrum — Lara Hoffmans, Forbes
With markets jittery and dipping into correction territory, here’s a follow up to my recent entry, Economy versus Earnings:
According to Thomson Reuters, as of July 29th:
- The S&P 500 estimated earnings growth rate for Q2 is 10.3% based on companies reporting thus far. (16.3% if you exclude Bank of America)
- 73% of the 327 companies in the S&P 500 that have reported have beaten estimates
Of course, earnings are backward-looking (they describe the past, not the future). But what this illustrates is that corporate earnings (part of the heart and soul of stock investing), are in fine shape right now.
Also, see my “Market yips” entry from June 16th: “Big up years, up a-little-years, and down years all have big individual up and down days. Stick with your strategy and don’t let market down days yip you into mistakes.” We can add to that: corrections routinely happen during perfectly fine market years, too.
Days like the ones lately aren’t easy to swallow, but getting whipsawed by a market correction is far worse.
So far, 2011’s been a difficult year: Bulls can’t get much traction, and bears are wondering when the big drop will happen—it’s been a choppy, basically flat market so far, where neither big fears like sovereign debt nor big boons like blockbuster earnings are tipping the scale either way.
In my view as a Fisher Investments analyst, the rest of 2011 likely holds more of the same. Here are six things investors should look for the rest of this year:
- Investors will be haunted by the ghosts of sovereign debt. My boss Ken Fisher wrote about this in his most recent Forbes column (read “Ghosts Around Every Corner” 7/18/11 here). And I quote: “It feels like there are ghosts around every corner. In 2008 and 2009 we came to fear mortgage debt problems and expected more of them. Debt fears have persisted ever since.” Indeed. Whether it’s US debt default fears, municipal debt fears, PIIGS fears, consumer over-indebtedness or some other debt fear, expect them to persist in the popular media but have a lesser and lesser effect on markets as the bull market goes on. It can be tough to see this but is plainly true—stocks have rallied strongly since March 2009, despite all the debt fears that persisted and morphed in that same period.
- Few will realize this isn’t a recovery. A simple, stark truth: We’re no longer in a recovery but an expansion. Nominal GDP—both in the US and the globe—is near or at all-time highs. Reading today’s headlines this seems almost impossible. But it is so. The global economy has recovered from the recession and is in expansion mode.
- More Financials underperformance. Based on Fisher Investments research, it’s typical for a sector leading a bear market down to get a quick pop in the initial part of the new bull, but then lag afterward (think Energy in the early 1980s and Tech in the early 2000s). Financials fit this archetype indubitably. They continue to be everyone’s favorite villain, and are likely to continue struggling mightily relative to the rest of the market this year.
- A continuation of the first half. I wrote about this back in March (Click here for the full recap.) In a nutshell: I think some investors will remain skittish and unable to shake the yips from the 2008 bear, others will see the last two years’ great run and get too bullish (instead, the market’s treaded water). Pessimism about the global economy will be rampant, with the effects of the Japanese earthquake overwrought (the earthquake effects are already passing, and GDP in many regions is coming in ahead of expectations). Some will panic about inflation (there’s been scant sign of it this year, and likely won’t be for some time to come). Others will fall in love with covered call strategies. And, lastly, many will go overboard on emerging markets investments (which have underperformed so far this year, and yes, inflows into those assets this year have been big overall).
- More “can it continue?” earnings chatter. Earnings have been far better than most anyone predicted for a few years running now. So far, Q2 earnings for this year are simply crushing expectations. Corporations won’t trounce expectations forever, but 2011 is a year where earnings remain strong and ahead of expectations. (More on earnings from Fisher Investments MarketMinder here and here.)
- The China and Emerging Markets “hard landing/soft landing” debate will drone on. I don’t believe in “landings” for an economy. It’s a bad economic metaphor (once an economy “lands”, then what?). As I said in March, don’t go overboard with emerging market stocks in your portfolio—sentiment is very high on them right now, which may limit upside potential in the near term. But I think you should expect their economies to continue driving strong corporate earnings and global GDP to new highs. Parts of emerging markets will thrive, some will dive, and some will tread water. But overall their growth probably won’t tank in 2011.
A flattish year in the stock market doesn’t mean it won’t be choppy—ups and downs are common and there won’t be any reprieve. But on balance, I think the rest of 2011 has neither great nor doomsday expectations. By the time we get to December, expect pundits aplenty to ask, “Where to now?” for the markets. They will cite “uncertainty” about 2012— uncertainty about the elections, about earnings, about the global economy. But when were markets ever certain looking into the future?
We’ll deal with 2012 when we get there. For now, steer clear of these common investing misconceptions for the rest of 2011.
Around my office the last few weeks we’ve joked that—once this debt ceiling drama is finally resolved—politicians would take credit for “saving the world”. Well, it turned out not to be a joke:
Forget about the ideology and bombastics of these types of statements (which, by the way, come from both sides of the aisle). What this really demonstrates is the wanton and venal quality of the beltway: that this is in fact mostly a drama being played out on the public stage to use as a fundraising and general election issue.
To get the real skinny on the US debt, deficit, and debt ceiling situation, head to Marketminder.com and read these: