Economic and Investment News Bits
- “U.S. regulations have made the entire U.S. population guilty of crimes they have never heard of, often for the most innocent and innocuous activities. The federal and state governments continue to push upwards of 1,000 pages per day of new rules, regulations, and other proposals. These include operating lemonade stands without a permit, collecting rainwater without a license, failing to file a government survey, not purchasing a license to go out of business, not obtaining a private investigator’s license to be a computer repair technician, and others”, (Source: Washington Times).
- If at first you don’t succeed: Today’s initial headline on CNNMoney: “China’s economy growing at only 6.9%, the worst growth since 2008.” Surely the sky must be falling! The folks at CNNMoney must have figured out this was predicted for weeks. (PDS even included this in our quarterly webcast earlier this month). Predictably, when no panic ensued, the headline was changed to “Oprah comes to the rescue of Weight Watchers.” That stock promptly shot up 99% in trading.
- Positive Economic Signs: Mortgage applications are surging, now at a 5-year high. New home and refinance applications are rising at double-digit rates. Home prices are also rising, with averages at the highest level in eight years. Manufacturers and service companies are experiencing difficulties in finding workers, having to raise starting wages, signs of a tighter labor market. Sales of new and used autos are exploding, boding well for new car production, as well as overall consumer spending.
- Negative Economic Signs: Global manufacturing data was down slightly last month, but the more forward-looking Purchasing Managers Index (PMI) is in expansion territory. The IMF sees a 50% chance the global growth rate will fall below 3% in 2016. The August U.S. trade deficit widened as exports fell to a stronger dollar and slower overseas growth. At the same time, imports jumped in part on a surge in new iPhone orders.
- “The U.S. moved from an infrastructure/construction/industrial economy to one that is consumer driven in the early 1980s. There were a few tough years. That is where China is now. It is going to take time”, (Source: Carl Kaufman, Osterweis Capital Management).
Thought for the week
“Ethics is knowing the difference between what you have a right to do and what is right to do.”
Potter Stewart, U.S. judge (1915-1985)
Market Correction or Bear Market?
We fielded some questions during the August-September market selloff. Most often, we were asked whether the 12% decline and higher volatility were signs of a bear market. We do not think so. Bear markets don’t just happen. External factors cause them. History shows that the following conditions have been associated with bear markets: aggressive interest rate hikes, high inflation, extreme valuations, oil price spikes, and economic recessions. None of these conditions appear to be on the horizon, and it is very unusual to have a bear market (decline of 20% or more) without a recession.
The Fed is certainly not aggressively raising interest rates. In fact, they have yet to make the first move. Inflation is still well below the 2% level the Fed has set as a test of an overheating economy. As for valuations, the S&P 500 Index forward P/E ratio is trading at 15.1 versus the 25-year average of 15.8, so not extreme at all. Oil price spikes, you ask? Not hardly. And an economic recession? While it’s true that the economy is not booming, there is a 75-month long, slow-growing expansion with a low unemployment rate, and strong corporate balance sheets. So if there is no bear market, is the correction over? That is more difficult to answer, since corrections can occur anytime for almost no reason at all. Will the Santa Claus rally come early this year? Anything is possible, but we would not bet the farm on it.
Graph of the Month (CLICK TO ENLARGE)
It is no secret. China is no longer growing at 10% per year. The growth may come in around 6-7% this year. As this slowdown takes place, we look at who would be impacted the most. Countries that rely on exports to China, such as Malaysia, Korea, South Africa and Thailand should be under the most pressure since over 10% of the GDP comes from exports to China.
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