For months the markets have been bearish over three things: the FED, Energy and China.
FED Interest Rate Hike
The FED seems like it wants an economy growing “not too hot and not too cold, but just right”. The economy needs the FED to start increasing rates so the markets can focus on more important issues.
The impact of the first rate increase is likely to be insignificant. According to LPL Financial Research, following the last three times the FED began raising interest rates, the economy continued expanding for an average of 69 months.
That’s nearly six more years of expansion!
Energy Sector / Oil Price Collapse
All year long, the energy sector has grappled with a price of oil that has been roughly half of its rate from twelve months earlier 1. Low oil prices equate to low profits for oil companies, so when they’re comparing this year’s profits to last, earnings look bad.
But lower profits are still profits and by the end of this year the comparisons get corrected.
More importantly, low fuel prices have a positive impact on virtually every other sector of the economy. It has been said that any reduction in gasoline prices acts like a tax reduction (stimulus) for consumers. Spending $10 – $20 less with every fill-up loosens those dollars to be spent or invested elsewhere, stimulating the rest of the economy. It is similarly positive for energy intensive industries, like transportation and heavy manufacturing.
China
China’s slowing growth, as the world’s largest population and second largest sovereign economy, has and will impact the global economy.
American companies don’t sell much to China, so the direct impact of China’s slowing on the American economy is insignificant. But, we sell a lot of stuff into economies that do sell into China and that’s where our economy is at risk.
Can our economy flourish while China flounders?
America is still one of the most important markets for almost all foreign enterprises. The European Union is roughly the same size as America and combined they represent over $35 Trillion of the world’s $78 Trillion GDP, or nearly half at 46%.2
Our current six year old expansion is “mature” but in my opinion has a lot of remaining life. Europe is in its “…third year of recovery, but economic growth remains stuck in low gear and output has yet to reach pre-crisis levels.”3 We believe that Europe is resolving their unique challenges and when combined with the current exchange rate, may offer compelling investment valuations.
With the developed half of the world economy in expansion, entities losing sales into China are likely to compete for opportunities to sell elsewhere, including America and Europe. While there is some deflationary pressure, cheap raw materials can translate into greater profits for manufacturers, and as we’ve recently seen with the new UAW / Fiat Chrysler agreement, can precipitate improved wages for employees.
Bearish markets and sectors often prove to be fertile ground for new investment opportunities. But they can also be signs of trouble ahead. If you’d like a review of how your portfolio might be impacted by current global conditions, call or email us to schedule a complimentary consultation.
1 Source: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=M
2 CIA World Factbook; https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
3 European Economic Forecast; Winter 2015; http://ec.europa.eu/economy_finance/publications/european_economy/2015/pdf/ee1_en.pdf; page 9
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies
Investing involves risks including possible loss of principal.
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