Economy vs. Earnings
I wrote in last month’s newsletter about the disparity between current economic data, which has been less than impressive, and corporate earnings, which have been surprisingly impressive, and the question on which piece of information will ultimately be the true indicator of where markets will head down the road. The conflicting data has the markets reacting on a day-to-day basis with sentiment swaying on the most current piece of news to cross the wires. It seems that there is no clear indication as to where the economy or the markets are heading. The struggle that the investing community is having is whether poor economic data will eventually start to effect corporate spending and lead to lower earnings, or if corporations, which are sitting on excess cash reserves, will start to increase capital expenditures that will lead to increases in both production and new hires, and thus improve future economic data.
Although it makes for great TV on CNBC, it does not really help investors feel too confident as to what direction to take with their portfolios. Lack of clarity leads to volatility, volatility leads to a sideways market. In my opinion, this is where we will be for the short term. Over the longer term, my feeling is that although economic data such as home sales and jobless claims have been short of positive expectations, they are not weakening to the extent that I fear we will slip back into a recession. Unfortunately, I also believe that we will not get the V shaped recovery everyone wanted. I see a greater likelihood of a sustained period of slow growth that could last for a couple years. The worldwide debt concern leads me to think it may take a while for the global economy to get growth rates beyond the low single digits. We may also need to look to non-U.S. areas of the world such as the emerging markets to be the leaders in helping the worldwide economic woes. The infrastructure spending on development of these growing countries could provide the natural stimulus needed to help create jobs since much of the companies helping with the development of areas such as China, Vietnam, Africa and India are U.S. and Europe based companies. I must say that relying on underdeveloped areas to lead the world out of economic malaise is not my preferred or most comforting option.
There is also talk the U.S. may provide another stimulus package to help ignite the economy. Not knowing if this stimulus would be in the form of monetary stimulus or tax cuts, I fear that the government may be creating an even greater future crisis if they add even more debt to their balance sheet. My hope is that they look at reducing the corporate tax rate, which may give companies greater confidence to spend on capital expenditures and begin to hire again.
I again stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
