Staying home makes the most sense for US investors
World trade figures point to weakness worldwide. And it’s not just oil and other commodities driving the numbers down—China’s export volume is down in the last year and so is Korea’s. Non-energy imports into the US are falling. Now the Federal Reserve is focused on international weakness instead of just attempting to manage the US economy. How does the world look?
No recession in sight, but corporate profits continue to fall. Consumers are in good shape with a decent labor market, a high savings rate, and strong spending—department stores being the exception. Bankruptcies continue to mount in the energy sector as the rest of us enjoy low gasoline prices. The weakest recovery in history (no year with more than 3% growth) may be making up for it by being one of the longest recoveries ever.
The biggest risk to world growth remains the slowdown in China. Much of their economy is in recession, or worse, while at the same time real estate takes another leg up. Chinese authorities have apparently decided to paper over their massive debt problem, as they increase spending on public projects. Officials are clearly worried about living through a much needed retrenchment, believing that a political crisis would be the result. The recent expansion in spending reminds us of Japan’s “bridges to nowhere” phase in the 1990’s. The world economy will grow more slowly if China follows Japan into its own lost decade.
The European Union remains in crisis. The open border policy is collapsing, radical parties on the right and left are gaining, and spread of negative interest rates increases economic uncertainty. It reminds us of the Holy Roman Empire, which was never holy nor Roman. The EU is no longer trending toward union and remaining European is also in doubt. Continuing crisis and low growth is the most we can expect for the foreseeable future.
Like Europe, Japan has entered the spooky world of negative interest rates. Failing to do much to reform the economy, Japanese authorities keep tinkering with financial tools that increasingly result in negative surprises. There is little to suggest that Japan will contribute anything to world growth in the next few years.
In a variety of ways, these formerly fast growing economies are suffering the most of the slowdown in China. Many produce commodities, all of which are selling for a fraction of their peak prices. But even manufacturing giants like Korea are feeling the pinch from reduced Chinese demand. The recent weakness in the dollar helps debtors in these economies, but over indebtedness remains the norm. Long term there is reason for optimism, however the next year or two are likely to be rough on EM investors.
US Stock Market
The US remains the best place to invest. As this dismal tour illustrates, the rest of the world offers either no growth or the risk of recession. However, the weak point in the US story remains corporate profits, so while a recession appears unlikely, the stock market needs profits to resume an upward trend—and quickly. Without profit growth, the market appears vulnerable.
The stock market has gone absolutely nowhere in the last 12 months. Interest rates are at an all time low. All of which has made making money in financial markets very difficult. All that said, this is not the end of the world and opportunities will present themselves. Holding on to the gains of the last seven years as we await those opportunities is our focus for the next several months.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.