An economic slowdown is a contraction in the economy. This can be viewed by using several indicators, including lower gross domestic product (GDP), higher unemployment, lower industrial production, lower business investment, a decline in retail sales, and a decrease in corporate profits. Not all of these factors need to be declining for an economic slowdown, but these are some of the main indications to watch for regarding the overall health of the economy. Some consider a recession to be occurring when there are two consecutive down quarters of gross domestic product (GDP). According to the National Bureau of Economic Research, a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real money, employment, industrial production and wholesale retail sales.”
I’ve been writing in these pages for most of 2014 on how the stock market has become one huge bubble. On my short list:
The economy is weak. The U.S. experienced negative growth in the first quarter of 2014. If the same thing happens in the second quarter (we’ll soon know), we will be in a recession again. Revenue growth at big companies is almost non-existent.
Insiders at public companies are selling stocks (in the companies they work for) at a record pace.
The amount of money investors have borrowed to buy stocks is at a record high (a negative for the stock market).
The VIX “Fear” index, which measures the amount of fear investors have about stocks declining, is near a record low (another negative for the stock market).
Bullishness among stock advisors, as measured by Investors Intelligence, is near a record high (again, a negative for the stock market).
The Federal Reserve has issued its economic outlook, and it says interest rates will be much higher at the end of 2015 than they are today and that they will continue moving upward in 2016.
The Federal Reserve has said it will be out of the money printing business by the end of this year. (Who will buy all those T-bills the U.S. government has to issue to keep in business?)
And yesterday, in an unprecedented statement, Janet Yellen, during her usual semi-annual testimony to Congress, said the valuations of tech stocks are “high relative to historical norms.”
How many warnings can you give investors?
Well, the warnings don’t seem to matter. The Dow Jones Industrial Average has … Read More
There are two important charts I want my readers to see this morning.
The first is a chart that is an indirect measure of demand in the global economy. Right now, the Baltic Dry Index (BDI) sits at its lowest level of the year. Since the beginning of 2014, the BDI has fallen 60%.
The BDI measures the cost of moving major raw materials by sea in the global economy. The thinking is that the lower the cost to move goods by ship, the lesser the amount of goods to move (a strict demand/supply price situation).
Chart courtesy of www.StockCharts.com
What’s happening with the steep drop in the BDI can be seen in a corresponding slowdown in the global economy.
Germany, the fourth-biggest economy in the world, saw its industrial production decline by 1.8% in May after falling 0.3% in April. (Source: Destatis, July 7, 2014.)
Great Britain, the sixth-biggest market in the global economy, saw its production decline 0.7% in May, while its manufacturing decreased 1.3%. (Source: Office for National Statistics, July 8, 2014.)
France, the fifth-biggest economy, reports no gross domestic product (GDP) growth in the country in the first quarter of 2014. (Source: MarketWatch, July 8, 2014.)
In 2014, the Chinese economy will grow at its slowest pace in years. In Japan, the Bank of Japan (its equivalent to our Federal Reserve) has announced it will start buying exchange-traded funds (in specific, the Nikkei 400 ETF) to “boost the impact of (its) unprecedented easing.” (Source: “Bank of Japan Seen Buying Nikkei 400 ETF,” Financial Post, July 10, 2014.) Yes, the central bank of Japan is buying … Read More
What led to the 2008/2009 stock market and real estate crash and subsequent Great Recession can be attributed to one factor: the sharp rise in interest rates that preceded that period.
In May of 2004, the federal funds rate, the bellwether rate upon which all interest rates in the U.S. are based, was one percent. The Federal Reserve, sensing the economy was getting overheated, started raising interest rates quickly. Three years later, by May 2007, the federal funds rate was 5.3%.
Any way you look at it, the 430% rise in interest rates over a three-year period killed stocks, real estate, and the economy.
My studies show the Federal Reserve has historically taken things too far when setting its monetary policy. It raised interest rates far too quickly in the 2004–2007 period. And I believe it dropped rates far too fast since 2009 and has kept them low (if you call zero “low”) for far too long.
In the same way investors suffered in 2008–2009 as the Fed moved to quickly raise rates, I believe we will soon suffer as the Fed is forced to quickly raise interest rates once more while the economy overheats.
It’s all very simple. The U.S. unemployment rate is getting close to six percent. The real inflation rate is close to five percent per annum, and the stock market is way overheated. The Fed will have no choice but to cool what looks like an overheated economy. But the Fed won’t be able to do it with a quarter-point increase in interest rates here and there. It will need to raise rates by at least … Read More
If there ever was an equity security epitomizing the notion that the stock market is a leading indicator, Caterpillar Inc. (CAT) would fit the bill.
This manufacturer is in slow-growth mode, but it’s been going up on the stock market as institutional investors bet on a global resurgence for the demand of construction and other heavy equipment and engines.
And the betting’s been pretty fierce. Caterpillar was priced at $90.00 a share at the beginning of the year. Now, it’s $110.00, which is a substantial move for such a mature large-cap. (See “Rising Earnings Estimates the New Catalyst for Stocks?”)
The stock actually offers a pretty decent dividend. It’s currently around 2.6%.
While sales and earnings in its upcoming quarter (due out July 24, 2014) are expected to be very flat, Street analysts are putting their focus on 2015. Sales and earnings estimates for next year are accelerating, and it’s fuel for institutional investors with money to invest.
The notion that the stock market leads actual economic performance is very real. Just like there are cycles in the economy, the stock market itself is highly cyclical. And while every secular bull market occurs for different reasons, there are commonalities in the price action.
Caterpillar’s share price is going up on the expectation that its sales and earnings (on a global basis) will accelerate next year.
Transportation stocks, as evidenced by the Dow Jones Transportation Average, are the classic bull market leaders.
Transportation, whether it’s trucking, railroads, airlines, or package delivery services, is as good a call on general economic activity as any. The Dow Jones Transportation Average was … Read More
By no surprise to me whatsoever, the government’s third and final estimate of first-quarter U.S. gross domestic product (GDP) came in at a negative annual pace of 2.9%. (Source: U.S. Bureau of Economic Analysis, June 25, 2014.) The U.S. economy’s growth rate in the first quarter of this year was the worst since 2009.
I’ve been writing since the fall of 2013 that the U.S. economy would see an economic slowdown in 2014. I have been one of the few economists warning of a recession in 2014. My calls are not to scare or create fear; rather, they are based on the government’s own data.
Not to boast, but it’s like the creators of the first-quarter U.S. GDP report have been reading Profit Confidential! Everything we have been warning about came out in this most recent GDP report.
I’ve been harping on about how the U.S. consumer was tapped out…and low and behold, consumer spending in the U.S. economy increased by only one percent in the first quarter of 2014. In the fourth quarter of 2013, consumer spending increased by 3.3%. The fifth year into the so-called economic “recovery” and consumers are pulling back on spending for the simple reason that they don’t have money to spend.
The poor have no money; the middle class has been wiped out. And the rich are far from spending enough to make up for the lack of spending by the poor and middle class.
But have no fear, dear reader; stocks are up. The stock market is telling us we have nothing to worry about? It seems so.
I, for one, … Read More
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