Is there a big crash coming?
How does the economic doom-and-gloom mesh with reality?
Radio ads, articles, political candidates claiming the sky is falling…there’s plenty of scary talk about a “major crash” looming. Does this sensationalism mesh with the reality, though?
There’s a lot of bad stuff going on. Oil price volatility? Check. World growth slow-down? Check. China growth slow-down? Check. Election year uncertainty? Check. Deadly natural disasters? Unfortunately, check. Yes, a lot is going on. There’re always plenty of bad things happening even when we’re experiencing solid economic growth.
The fundamentals tell a different, positive story, contradicting the doomsayers. First off, U.S. GDP is again set to break records. According to the IMF, we’ll hit new highs for the next four years, including this year. We’ll grow from $19.8 trillion to $24.7 trillion. No major drop is expected. Will we have a bad quarter? Maybe. A bad year? It doesn’t look like it.
Our economy is growing. It’s slower than it should be but is better than other developed regions like the Euro-area or Japan.
THE OTHER BIG FUNDAMENTAL: EARNINGS
The stock market tends to move up and down with corporate earnings and a good proxy of this is the S&P 500. The S&P earnings have been very solid. If the current estimates occur, then we’ll have seven straight years of new, record earnings. This began in 2011 and is expected to go on as far as there are estimates for (2017).
Can an out-of-left-field, black swan event occur in the mean time? Of course, it can. Yet, if things stay on track, our markets should hold up nicely, maybe hitting more new highs.
THERE IS ONE CONCERN…
Since our recent expansion started the glaring weakness has been corporate revenue. At times it was up only 2-3 percent, maybe lower. Not great. Corporations have increased earnings largely by buying back shares and with heavy cost cutting.
Just a bit of the earnings expansion was due to organic revenue growth. This needs to pick up to be really healthy. That should happen when the economy starts moving faster, though.
“BECAUSE THAT’S WHERE THE MONEY IS,”
…was the reply infamous Willie Sutton gave of why he robbed banks. My version of this is “because that’s where the bargains are.” With all of this being said about the positive U.S. economy, should we invest even more here?
You need a moderately large U.S. allocation. A lot of money is flowing to the U.S. due to foreign volatility, keeping our markets strong and maybe producing good returns. You want that growth exposure. Yet the domestic market is still not under-valued, excepting a few sectors.
Those same markets that are experiencing slowness are where the bargains and opportunities are now. Emerging markets are especially cheap. All of the BRIC economies are lower, including China and Russia. Same with developed foreign markets, including select European countries. Now’s the time to be finicky and buy quality at a good price.