The American Economic Oasis in a World of Hurt

By David Lee Smith, Ph.D

Two of us at American Values Investments apply training in economics to our ongoing analysis of the markets and the global circumstances that affect them on a day-to-day basis. My colleague George Parks is as capable as anyone I’ve known at ferreting out the likely direction of both the markets and the individual stocks that comprise them. My bailiwick lies more in observing the global picture, especially as it relates to our domestic economy. At least for the moment, George’s world appears far less chaotic than mine.

As he noted recently, for instance, August retail sales were up more than was expected. That’s far more than just an interesting factoid. As you likely know, consumer spending is responsible for about two thirds of our gross domestic product. So, as he also said, the consumer continues to be the driver of yet another upward revision of GDP statistics. But while consumers continue to display relative ebullience, the component of our GDP accounted for by business and industry remains a laggard. However, a recent jump in industrial capacity utilization has been an unexpected positive sign. The question, as George points out, is whether that lofty situation is sustainable or is merely a flash in the pan.

The question is whether America’s current lofty economic situation is sustainable or is merely a flash in the pan.
George Parks, CFP, Chief Investment Officer

The Fed: Whittling or Cutting?

And then there’s the Federal Reserve, which, as expected, last week lowered its target range for its benchmark interest rates by a quarter of a point. But while that move didn’t catch anyone off guard, neither was it decided unanimously. In fact, seven of the 10 Fed officials casting votes opted for the modest cut, with two others pulling for no change and another opting to push for a half-point reduction. For their parts, the markets generally appeared to take the final decision in stride.

From a fundamental perspective, overall equity prices appear to be neutral. Relative to fixed income and commodities, equity prices seem a bit more attractive.

George Parks, CFP, Chief Investment Officer

So where does this leave the domestic markets? Again, we can turn to George Parks, who wrote recently on that very subject: “From a fundamental perspective, overall equity prices appear to be neutral. Relative to fixed income and commodities, equity prices seem a bit more attractive. Historically, the fourth quarter has been good for equity markets, especially when the first three quarters have been good. October has generally been a good month, but there have been some rather large anomalies in October in the past.”

Hopscotching the World

Which takes us to a quick look at the far more topsy-turvy global picture. In that connection, if you think about it, America today is an economic oasis amidst a world wherein numerous countries are struggling with currently deteriorating situations. Clearly, one of our most important stops is China, which sports the world’s second-largest economy. The U.S. and the Chinese have been at loggerheads for some time vis-à-vis trade, but there nevertheless is something of a dim light at the end of the tunnel that’s provided by an apparent willingness of the leaders of the two countries to meet in October and attempt to iron out their differences. We can only hope for a better outcome than has emerged from past sessions.

And then there’s Europe, where fully 19 countries are beset by negative interest rates, hardly a sign of economic prosperity. The list includes some important names, such as Switzerland, Germany, and Austria. One objective of those pushing for another rate cut by our Fed is to create something of an elixir that would help ward off that contagion and keep it from spreading to our shores. It’s also worth noting that Britain’s torpid pace regarding a final decision on Brexit isn’t aiding its friends on the continent in the least.

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Next we land in the Middle East, where Iran’s obstreperousness appears to demand some sort of retaliation by someone, most likely Saudi Arabia and some of its smaller allies. It appears clear that there’s little appetite in the U.S. for participation in that potential spanking, except for supplying arms to the Kingdom and holding the Saudis’ coats, err, robes in what promises to be a massive conflagration. Regardless, any new fisticuffs in the Middle East would severely rattle markets worldwide.

Conclusion

Where then does all this lead us? As is stated above, at this juncture, equities appear to carry the most promise. But with a world that’s progressively more awry, there’ve been few periods in which careful, concerted, and diligent research on target investments has been as necessarily the order of the day.

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