Ouch!
It was no fun to be
an investor last week. The week prior, a commentary in The Wall Street Journal’s blog, MoneyBeat,
offered this insight:
“Falling oil prices
are thought to be good for stocks because they stimulate consumer spending and
hold down inflation. The lower costs support economic growth, boost corporate
earnings, and lessen pressure on the Federal Reserve to raise interest rates.
The stock market loves that mix.”
That was not the
case last week. A selling spree, sparked in part by concerns related to energy,
led to virtually every major world stock index (every one that Barron’s follows, anyway) moving lower.
The single exception was the Shanghai Composite and that was flat.
It seems the International Energy Agency’s prediction
that demand for energy would grow more slowly in 2015, combined with the fact supply
of some resources has been growing, addled investors and they sold everything
but the kitchen sink. Even industries that may be helped by lower energy costs
– consumer goods, consumer services, health care, and others – lost value. In
the United States, stock markets delivered their worst performance in more than
three years, according to Barron’s.
Have investors lost
sight of the fact the United States has a consumption-driven economy?
The Federal Reserve Bank of St. Louis
reported personal consumption – how much Americans are spending on goods and
services – was 70 percent of gross domestic product (the value of all goods and
services produced) in the United States during the third quarter of 2014. Lower
energy prices tend to put more money in the pockets of consumers so they can
spend more and that can help the economy grow. In fact, U.S. News reported, “…approximately every penny decline in the
price of a gallon of gasoline translates to about $1 billion in additional
disposable income for American households.”
It’s interesting to
note consumers – a group that overlaps with investors in a Venn diagram – are
more confident than they have been in almost eight years, according to data
released by the University of Michigan and cited by Barron’s.
what does the future hold? The good news is
most analysts expect economic growth in the United States to continue. The Wall Street Journal, The Economist, The Federal Reserve, and the International
Monetary Fund all have forecast gross domestic product growth in the United
States at 2.5 to 3.0 percent for 2015. That’s not quite as good as the 7
percent growth forecast for China or the 6.5 percent growth estimated for
India, but it’s decent for a developed nation with a mature economy.
There
are factors that could hurt the economic outlook in the United States.
Economists participating in The Wall Street Journal’s Economic Forecasting
Survey said a negative global event was the biggest threat to U.S. economic
growth followed by slower global growth. Three of the risks The Economist believes could keep
companies from operating at target profitability during 2015 include:
·
Deflation in the
Eurozone:
“A Japanese-style stagnation in the euro zone would have profoundly negative
implications for global demand, especially at a time when growth in the
emerging markets is also softening.”
·
Spillover from
Syria’s Civil War:
“…The prospect of [ISIS] diverting its energies from Iraq and into Syria and
its neighbors (such as Lebanon and Jordan) could prompt an uptick in oil's
political risk premium once more.”
·
Escalation of the
Russia-Ukraine conflict: “…The recently
imposed trade restrictions have not only plunged Russia into recession, but
also contributed to sinking industrial output in Germany… further sanctions
could see Russia cutting off natural gas sales to Ukraine or the European Union
(as is currently already reportedly occurring with supplies to Poland)… [these
acts] would no doubt have a deleterious impact on the [Euro] region's economic
recovery.”
There are also factors that could improve the
outlook. The
Wall Street Journal’s survey found economists
believe tightening labor markets, higher
wages, better consumer spending, and low energy prices could support U.S.
economic growth during 2015.
Weekly Focus – Think About It
“The
way a team plays as a whole determines its success. You may have the greatest
bunch of individual stars in the world, but if they don't play together, the
club won't be worth a dime.
--Babe Ruth, American baseball player
No comments:
Post a Comment