Ever since the 2008-2009 financial crisis, every time the stock market has experienced a -5%, -10%, or -15% correction, industry pundits and media talking heads have repeatedly sounded the “Double Dip Recession” alarm bells. As you know, we have yet to experience a technical recession (two reported quarters of negative GDP growth), and stock prices have almost quadrupled from a 2009 low on the S&P 500 of 666 to 2,378 today (up approximately +257%).
Over the last nine years, so-called experts have been warning of an imminent stock market collapse from the likes of PIIGS (Portugal/Italy/Ireland/Greece/Spain), Cyprus, China, Fed interest rate hikes, Brexit, ISIS, U.S. elections, North Korea, French elections, and other fears. While there have been plenty of “Double Dip Recession” references, what you have not heard are calls for a “Double Dip Expansion.”
Is it possible that after the initial 2010-2014 economic expansionary rebound, and subsequent 2015-2016 earnings recession caused by sluggish global growth and a spike in the value of the U.S. dollar, we could possibly be in the midst of a “Double Dip Expansion?” (see earnings chart below)
Whether you agree or disagree with the new political administration’s politics, the economy was already on the comeback trail before the November 2016 elections, and the momentum appears to be continuing. Not only has the pace of job growth been fairly consistent (+235,000 new jobs in February, 4.7% unemployment rate), but industrial production has been picking up globally, along with a key global trade index that accelerated to 4-5% growth in the back half of 2016 (see chart below).
Source: Calafia Beach Pundit
This continued, or improved, economic growth has arisen despite the lack of legislation from the new U.S. administration. Optimists hope for an improved healthcare system, income tax reform, foreign profit repatriation, and infrastructure spending as some of the initiatives to drive financial markets higher.
Pessimists, on the other hand, believe all these proposed initiatives will fail, and cause financial markets to fall into a tailspin. Regardless, at least for the period following the elections, investors and companies have perceived the pro-business rhetoric, executive orders, and regulatory relief proposals as positive developments. It’s widely understood that small businesses supply the largest portion of our nation’s jobs, and the upward spike in Small Business Optimism early in 2017 is a welcome sign (see chart below).
Source: Calafia Beach Pundit
Yes, it is true our new president could send out a rogue tweet; start a trade war due to a tariff slapped on a critical trading partner; or make a hawkish military remark that isolates our country from an ally. These events, along with other potential failed campaign promises, are all possibilities that could pause the trajectory of the current bull market. However, more importantly, as long as corporate profits, the mother’s milk of stock price appreciation, continue to march higher, then the stock market fun can continue. If that’s the case, there will likely be less talk of “Double Dip Recessions,” and more discussions of a “Double Dip Expansion.”
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
March 19, 2017 at 12:34 pm
Article from Sidoxia Monthly Newsletter (Subscribe on right-side of page)
As we approach the 2010 finish line, investors are reevaluating their nest eggs and investment positioning for the New Year and the new decade. After experiencing two “100 year floods” over the last decade in the form of the technology and credit bubbles bursting, a wave of conservatism has swung everyone over to one side of the boat, in the form of cash, CDs, Treasury Bonds, and other fixed income instruments.
These conservative tools should absolutely be a part of everybody’s portfolio (especially for those in or near retirement), but an overly conservative portfolio can end up drowning more people than saving them. Bonds run the risk of collapsing in value if interest rates spike or potential inflation rears its ugly head. Under both scenarios, purchasing power and retirement lifestyle can be significantly compromised. Diversification and duration shortening (less sensitivity to interest rate changes) strategies should be explored to better manage these risks.
Ignore the Good, Highlight the Bad
With the financial crisis so close in our rearview mirror, putting those fiscal fears to rest can be difficult, even if the equity markets have rebounded between +80% (S&P 500) and +100% (NASDAQ) over the last 18 months. These fresh worries have diminished the attention placed on some of the positive undercurrents occurring in the economy:
· GDP Growth: You wouldn’t know it, but we have experienced five consecutive quarters of GDP (Gross Domestic Product) growth with a recently upwardly revised Q3-2010 growth figure to +2.5% (from previous +2.0% estimate).
· Job Growth: Although the unemployment rate has stubbornly remained in the 9.6% range, the country has created more than 1million jobs over the last year, thanks to ten consecutive months of private job creation. We’ll find out more about hiring trends this Friday.
· Record Profits: S&P 500 profits are on track to exceed the $88 peak profit earned by the index in 2006 (Thomson). Corporations may not be hiring in droves, but the cash is piling up for increased investment and pent-up hiring. Unprofitable companies generally do not hire.
· Changing of the Guard: Regardless of political leanings, with Presidential re-elections only two years away and Republicans gaining control of the House, some common ground between the Right and the Left could be found. Specifically, gridlock is the default, but there is genuine potential for compromise on taxes, fiscal restraint, tax relief, and investment incentives with the aim of sparking job creation.
· Holiday Cheer: Holiday sales got off to a good start judging by “Black Friday” (the day after Thanksgiving) and “Cyber Monday” – the day after Thanksgiving weekend. Sales on Cyber Monday rose +19.4% versus last year, according to Coremetrics. Traffic to retail stores and websites over Black Friday weekend increased by +9%, reportedthe National Retail Federation.
Keeping a lid on the enthusiasm are the following:
· Un-Luck of the Irish: With the recently announced $112 billion bailout of Ireland, focus has returned to the other side of the pond. Too much debt at Irish banks and excessive spending by the government has forced a large bailout, which has created contagion worries across some of the weaker Eurozone countries.
· Korean Skirmish: Apparently sinking a South Korean warship earlier this year was not enough belligerent activity for North Korea in a year, so they decided to bomb and kill innocent civilians recently. Will China help deflate the tension, or will our military just get stretched thinner in support of our southern ally?
· QE2/Inflation: Yesterday the fear was deflation, today the fear is inflation, but don’t hold your breath, a new “flation” phobia will likely be reintroduced tomorrow. Although the U.S. dollar has bounced of late on European concerns, longer term investors worry about the debasement of the currency because of funny money printing.
· China Taking a Brake? Inflation is on the upswing (+4.4% in October) and concerns over Chinese government officials pressing the brakes on speculative real estate growth (reserve rate increased by +0.5%) may hamper overall expansion.
· Insider Trading: Consensus thinking has it that Wall Street is rigged. The SEC is hoping to rebuild credibility after receiving a black eye for its poor handling of the Bernie Madoff Ponzi scheme scandal. The FBI raided three hedge funds, which may be the beginning of a widespread investigation.
As you can see, some items fall on both sides of the positive/negative ledger. Although many of the green shoots of 2009 have sprouted, critics complain the recovery process has progresses too slowly. Regardless of the worries, we have had 11 recessions and recoveries since World War II, and the average expansion has lasted five years. While we approach the next decade, do your portfolio a favor and focus on optimizing a proper diversified portfolio taking advantage of current multi-year opportunities, rather than succumbing to the endless fountain of daily pessimism.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
December 1, 2010 at 12:37 am