First and Ten. The market rally is by some measures getting a bit late in the game. Or so we’re told. But when analysts look in the rear view mirror utilizing historical data for their projections there remains the great game changer and historical neutralizer, Quantitative Easing (QE). Never has there been as much cumulative monetary stimuli thrown at an economic catastrophe as currently unleashed. If only that were accompanied by any reasonable fiscal response the recovery would most definitely be much further along.
First where we’re at:
The economic recovery is on soundly sturdier ground with momentum building for a continuation. First quarter GDP was revised up from a -2.9 to -2.1% contraction while second quarter GDP clocked in at a +4% expansion. Strength was witnessed nearly across the board. As far as I’ve read no economist or analyst can explain the -2.1% contraction for the first quarter when taking into account all the supportive positive data point readings going into quarter end. That first quarter reading may ultimately be adjusted yet again when final revision are made. The second quarter snapback saw continued strength in all major data points we follow including both ISM Purchasing Managers Indexes, Industrial Production, Leading Economic Indicators, Consumer Confidence and of course Jobs. On the last note July’s recently released Non-Farm Payroll figures came in at +209,000 down from June’s revised up figure of +298,000 but still notching the sixth straight monthly gains above 200,000 jobs created. Also within the report we see the workforce participation rate ticked up a notch to 62.9% which would suggest more people re-engaging the workforce as they become more confident in their prospects.
If all is so good what’s the problem? To borrow a Clara Peller-ism, “here’s the beef”:
1.The Eurozone. The European economy is arguably almost a solid two years behind the US recovery. The lag is partly due to former ECB President Trichet being asleep at the wheel on inflation watch as their economy was on the brink of seizure and in dire need of monetary easing. The EU zone is under renewed pressure from economic sanctions being imposed upon trading partner Russia. As the EU is just barely emerging from contraction to expansion mode the Russian anvil is proving to be a heavy weight to bear. Russia is not that much of an issue with regard to US trade however, it is a major exporter of energy and important trade partner in many areas of the EU economy. The ripple effect those sanctions may have on the EU economy showing up on US shores is important. The EU is an important trade partner for the US and any slowing in demand for our good directly affects US trade and growth.
2. The Middle East. The Middle East is en-fuego. The US’ end to engagement in Iraq, Afghanistan and an unwillingness to directly engage in Libya and Syria resulted in a vacuum of power. Right or wrong, knowingly or unknowingly the US left open the gate for natives and /or extremists to fill that void. The geographical and political lines in the Middle East are literally being redrawn daily with each battlefield victory and defeat. Any disruptions to trade and specifically oil could result in a super spike in oil pricing pressuring all assumption for global growth. As for now, prices remain stable and have defied the turmoil and actually declined 4% over the last two weeks.
Where we’re going:
US economic growth is gathering steam. Consumers are more confident. Corporate expenditures are finally ratcheting up after being near absent the prior three years. Pent up demand for automobiles and housing is finally being released. Unemployment is dropping while new entrants are taking high paying quality jobs. Corporate revenues and earnings growth are both robust and steady. Energy prices are declining creating a wealth effect as an effective tax break for consumers. All this while global monetary policy remains incredibly accommodative One key for investors to take away from this last point, typically bull markets end with restrictive monetary policy, an extreme exogenous shock to the system or stretched valuations. We can say confidently two of these three factors currently do not exist nor do we see either in the coming quarters. So, ex the external shock to the economy or markets, the view here at GSA, which is not aligned with the street consensus, is it’s time to grab a beverage and a dog, find your seats and get ready for the third quarter kick-off because we’ve got plenty of game left here.
Thank you again for your confidence and patience in these very challenging times.
Yours In Pursuit of The KWAN
James
