In the first four months of this year, January to April, prices in the U.S. declined by 0.2%. But this shouldn’t be a reason to jump to the conclusion that deflation will prevail for the U.S. economy. (Source: Bureau of Labor Statistics, last accessed May 31, 2015.)
Probability of Deflation in the U.S.: Zero
The Federal Reserve Bank of Atlanta calculates the probability of deflation by using the price of .
On Tuesday June 2, 2015, Eurostat, the European Union’s statistics office, released the eurozone area’s inflation data for May, which is at an annualized rate of 0.3%. (Source: Eurostat, June 2, 2015.)
All Components Increased Except for Energy
The positive 0.3% inflation in May is an improvement from April’s zero percent.
Among the components, services enjoyed the largest increase of 1.3%, compared to one percent in April. Food, alcohol, and .
My colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.
Here it is:
“The actions of the Federal Reserve (how far they went to ‘stabilize’ the .
The Bureau of Labor Statistics (BLS) reports inflation in the U.S. economy increased by 0.1% in February from the previous month. (Source: Bureau of Labor Statistics, March 18, 2014.) As usual, these numbers have again brought up the theory of deflation—a period when general prices decline.
Reasons for the deflation fear? In 2013, inflation for the entire year was 1.5%. In 2012, it was 1.9%. Going back further, in 2011, .
Following a weak second quarter, the Dow Jones Industrial and S&P 500 indices are now in positive territory for the first time since the end of the first quarter on the backs of a positive July and August.
So far, August has proven strong for technology, growth, and small-cap stocks, with the NASDAQ and Russell 2000 up 4.2% and 3.4%, respectively, as of the close of Thursday. The S&P 500 .
The stock market is ticking higher in the face of continued weak economic news, and it’s mostly due to the good corporate profits we’re getting. For the most part, we’re so far seeing good corporate profits, because expectations were already reduced. Some companies are slightly reducing their outlooks for the rest of this year, but the declining visibility is modest. Corporations are being extremely conservative with their forecasts and rightly .
In recent history, without dividends, stock market investors would generally be losing money. And this doesn’t include losses relative to the inflation rate. It’s been such a difficult stock market for the last decade, and the extreme volatility serves to illustrate just how risky equity securities can be.
In the 80s and the 90s, the best bet in town was the technology sector. The bull market was so strong that .
The stock market is behaving extremely well considering the huge amount of investment risk in the global marketplace. There is, however, no other place for investors to put their money and be able to generate income (dividends) that beats the inflation rate. All assets are risky: real estate, gold, the stock market and even cash. Investor sentiment is all over the map these days and it’s the new reality in .
Investor sentiment continues to be best reflected in oil prices, which keep taking it on the chin. Certainly there’s an argument to be made that low oil prices are good for the economy and stimulative, but a WTI oil price below $85.00 a barrel reflects a global marketplace that’s very worried about the future. The worry is about slowing growth or lack of growth in the world’s most important economies.
Two decades ago, everyone was making money from the stock market. There was a boom, and some of the best stocks were in the technology sector, mostly due to the proliferation of the Internet. You didn’t even need to own the best stocks; just owning the index was a profitable investment strategy. Then, the best stocks and the rest of the market came apart, because valuations got too extreme for .
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 29, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)