Economic and Stock Market Update Third Quarter 2014

The market has been brutal over the last 6 weeks – and even more so last week.  Let’s get some perspective on what’s happening right now and some possible explanations of what’s behind it all.

Year To Date

As difficult as the market has been lately, indexes are still up year-to-date. If you consider what is happening around the globe, it’s interesting that returns for the year are as even as they are.

Military conflicts are flaring up all over the world. On top of that, the economies of China and Europe are slowing. I think the reason the market has held up as well as it has  is because the United States is stable and our economy is still expanding. The safe haven of the United States has been a magnet for world-wide investment. That strength kept investors’ confidence relatively high and our markets somewhat even until recently.

What’s Driving Our Economic Growth?

Manufacturing actively remains strong even though it did slow a little in September. The ISM manufacturing index was down a few points from the prior month – but the August number was the highest ever in over 3 ½ years. Production is also up to the best levels seen in over 4 years.

One of the main components of our expansion is the auto sector. Consumers are getting rid of their old jalopies and they are buying new cars. In fact, auto sales during the third quarter were the highest in 8 years. That may be slowing a bit now, but those brisk sales acted as a huge primer for the economy as a whole and the impact is still being felt.

In order for our economy to enjoy sustained growth, American corporations have to start spending the cash they’ve been hoarding for years.

Well, that business spending may be at hand. Manufacturing utilization is at a high point now. That means businesses have no choice but to open up their wallets and invest. We’re starting to see this spending manifest. Core capital goods orders are up 7.8% for the year and that is a healthy development indeed.

Bottom line on the economy? Despite international unrest, danger and economic woes, the American economy is growing stronger for now. GDP is on track to grow by 4.6% for the year and that’s a blistering pace. And it is especially impressive in light of the GDP’s 2.1% contraction during the 2nd quarter.

Increased corporate spending in conjunction with higher employment, a richer consumer and stronger housing and auto sectors could lay the foundation for continued expansion.

What’s In Store For Interest Rates?

Of course nobody knows what lies ahead for interest rates or how rates might impact investments.  But interest rates might remain low for a while. The Fed is happy that our economy is moving forward but wants to make sure it doesn’t stall. Because of that, interest rates may not
rise as quickly as you might think.

What Might Cause Our Economy To Stall?

While things at home are moving ahead nicely, we depend on international demand for our goods and services to keep the wheels turning. Without that, our economy will eventually sputter. And on the road to financial progress ahead there are plenty of potholes we have to be aware of.

Europe will probably continue to struggle in recession. That keeps a lid on overall demand and growth here at home. And Europe’s problems may be prolonged. They stem partially from sanctions against Russia for its nasty behavior in Ukraine. That conflict doesn’t look like it’s going to be resolved quickly and that may prolong Europe’s economic woes.

There are other areas of concern as well. I suggested earlier that the Chinese economy is slowing. That is true. On top of that, political unrest in Hong Kong creates more uncertainty about what may lie ahead for China and the entire region. That ambiguity threatens our markets too.

All these uncertainties (plus those in the Middle-East of course) make experts question whether or not U.S. companies can continue to grow profits. The good news is that these worries could keep interest rates low in the United States for a while. The bad news is that if these problems get out of hand they could derail our recovery. We’ll have to wait and see.

If The Economy Is Strong Why Was September So Hard On Investors?

As I shared above, the American economy is strong and growing right now. So why did the market fizzle in September?  Why is the market doing so poorly right now?

For one, investors have to expect periodic weakness. It’s normal. I’ve noted some of the concerns that investors have above. The market has risks. Nobody knows when market declines are going to occur or how long they will last.

But we do know that market drops are common and an unfortunate part of the process that investors must endure over the short run in order to achieve their long-term goals.

So we have to expect market declines. But I don’t think we have to react in fear to them even when these pullbacks are frightening . I say that because most market declines ended as quickly and as unexpectedly as they came historically.

Of course the past is no guarantee of the future. But I think that the only people who have to fear market corrections are those who do not have an investing discipline. Those are the unfortunate people who get shaken out of their holdings when things get tough and get left on the sidelines when the market begins its ascent again.

How To Manage Risk

I am not suggesting that you should be fully invested in equity at all times. My experience over the last 30 years tells me that you should have a portfolio that balances the risk you feel comfortable with – and the risk you must take in order to achieve your long-term financial goals.

If you’d like some help finding the right investment strategy, let me know.  I’d be delighted to discuss this with you further.