Economic Data Stronger Than Media Portrays by ToddSullivan, ValuePlays
If you listen to the media, the recent reports on Retail Sales and Personal Income would tempt you to run to a cave somewhere deep in the woods. The talk is about weakness in retail sales, personal income, a high stock market which is not supported by economic fundamentals and terror abroad with potential conflict with Russia and ISIS. The often asked question is, ‘What is holding this market up?’ Many believe it is simply that the Fed has made money so cheap(meaning low rates) that it has no where to go but into stocks. Once rates rise they say the markets will collapse. One recent media guest has had extensive exposure with his expectations for a 50%-60% collapse in stock prices the next 18mos. The actual economic data is quite good historically. At record highs!!!
Economic data supports current value of stocks
My opinion, is that fundamentals are operating to support the current value of stocks. The fundamentals of which I speak are there for all to see. I only show two of these today, i.e. Real Retails and Food Services Sales and Real Disposable Personal Income-see the trends in the charts below. Income and spending are basic to economic activity and look quite healthy and at all time highs currently. In the past this has always supported higher stock prices! I do not see why today is any different.PIMCO’s Johnson, GMO’s LeGraw and DWS’ Rudy at Morningstar on how to hedge inflation
Inflation has been a big focus of Wall Street in recent months, and it won't go away any time soon. But where do we stand with inflation? Has it peaked, or will it continue higher? Q2 2021 hedge fund letters, conferences and more Nic Johnson of PIMCO, Catherine LeGraw of GMO, and Evan Rudy of Read More
Economic data: Fed keeping interest rates low
Also, I will repeat my strongly held belief that the Fed keeping longer term rates low has hurt the economy by keeping credit spreads narrow. With a higher level of regulatory cost to lenders, mtg lending at 4.2% actually prevents the typical mortgage and commercial lending we have seen in the past. There is not sufficient spread from the cost of funds to cover lending costs to the average borrower. Net-net is that lending is going to those who really have plenty of assets where borrowing is simply a finance option but not the only option. Lending is going much more to the wealthy and not to the rest of the population. This results in many of the things we are hearing about so frequently concerning income equality.
A normalized lending climate is how the middle class grows. Lending to home and commercial construction projects is precisely how those without college educations and immigrants enter the work force. Many start as day laborers but with initiative can quickly increase incomes as they pick up skills. When construction is robust, receiving a salary of more than $100,000 for a needed skill set is how these individuals put their children through college who then enter the professionally employed middle class. This is what parents do for their children and how the cycle works. Construction work is well paying when the economic cycle is operating normally and income equality is not the issue it is today.
Economic data: Higher rates will widen credit spreads
I am all for higher longer term rates. Higher rates will widen credit spreads and broaden lending to the hundreds of thousands of recent college graduates with student loans who do not qualify for mtgs in the current regulatory climate. This will stimulate home building and construction employment which carries a 7x multiplier for employment elsewhere in the economy.
I heard this morning on CNBC that there is not a shred of evidence that low rates have hurt the economy. I disagree. I see harm showing up everywhere.
Fortunately, we have had overly restrictive government interference in the economy in the past and we can see that while it may slow things down the people typically finds work-a-rounds. Non-bank financial institutions have sprung up and have rapidly taken ~25% of the mtg market. I expect this to continue and stocks in my opinion are slated for much higher prices the next 5yr-7yrs.