Multiple Worries Continue To Hammer The Stock Markets by Gary D. Halbert
FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
January 26, 2016
IN THIS ISSUE
- Advance Estimate on 4Q GDP Will be Released on Friday
- Multiple Worries Continue to Drive Stocks Sharply Lower
- Putting the Latest Stock Markets Plunge in Perspective
- Obama Continues to Betray America’s Best Interests
The major US stock markets have turned in their worst January performance in history, as have many equity markets around the world – and the month is not over yet. As a result, we’ll keep our focus on what is driving this extremely volatile move.
Before we get to that discussion, let’s preview this Friday’s first estimate on 4Q GDP. Based on the pre-report consensus, Friday’s report is expected to be much weaker than the 2.0% growth in the 3Q and a fraction of the 3.9% growth in the 2Q.
We’ll finish today with an outstanding but very troubling article on President Obama’s plan to empty the Guantanamo Bay military prison, without Congressional approval, before he leaves office. The writer believes Mr. Obama may also be planning to give the prison back to the Castro Bothers in Cuba by the end of this year. You will definitely want to read this!
Advance Estimate on 4Q GDP Will be Released on Friday
The Commerce Department will release its first estimate on 4Q GDP on Friday morning at 8:30 ET. Most forecasters believe that the US economy decelerated in the 4Q. The pre-report consensus is for GDP growth of only 0.9% (annual rate) in the last three months of 2015.
That’s down from 2.0% in the 3Q and 3.9% in the 2Q. If the 4Q advance estimate comes in at the pre-report consensus of 0.9%, that means the economy grew at an annual rate of only 1.85% for all of 2015. Keep in mind that the 4Q GDP estimate will be revised two more times, at the end of February and March.
Of course, there is a chance that Friday’s GDP report will come in below expectations. The Atlanta Federal Reserve Bank’s GDPNow forecast – which is designed to estimate GDP in real time – stood at only 0.7% as of January 20, up slightly from 0.6% a week earlier. This reading has declined sharply since the 2.0% estimate on December 17.
Multiple Worries Continue to Drive Stocks Sharply Lower
The major US stock markets have turned in their worst January performance in history, as have many equity markets around the world – and the month is not over yet. As a result, we’ll keep our focus on what is driving this extremely volatile move. Let’s run through what most consider the main drivers of this massive sell-off.
Overvaluation. One standard measure of stock values is the price-to-earnings ratio, or PE. It compares the market’s average stock price with the earnings (profits). If a stock sells at $10 a share and has earnings of $1 a share, the PE is 10. By this indicator, the market was high last year. The average PE for the S&P 500 Index stocks since records have been kept (1870) is 16.6, according to Standard & Poor’s. By contrast, the market’s PE was apprx. 21.5 at the end of 2015, suggesting an overvaluation by this measure of nearly 30%.
China is Weakening. Just a few years ago, China’s economy was growing by 10% or more a year. Last week, China announced that its economy grew by 6.9% in 2015, slightly better than most forecasters expected. It also said the official target for 2016 is 6.5%. The problem is that there is a healthy distrust of the economic figures published by the Chinese government.
Whatever the real numbers are, China’s appetite for raw materials (metals, foodstuffs, fuel and many other commodities) has fallen significantly, resulting in surpluses of many commodities around the world. Many emerging market commodity producing countries (Brazil, South Africa, Indonesia, Asia, etc.) that sell to China have been hit hard, and their economies are suffering.
This has raised concerns about a new global recession in 2016. However, we should keep in mind that the International Monetary Fund estimates that global growth will be 3.4% this year; emerging countries will grow by 4.5%; and Europe by 1.7%. While these estimates are likely to be revised somewhat lower in the months ahead, the IMF does not see a global recession this year or next.
Collapsing Oil Prices. Normally, lower oil prices are considered an economic stimulus, as consumers save money at the pump. But it’s unclear now how much of these savings are being spent. Meanwhile, oil companies are laying off tens of thousands of workers and reducing their exploration and development budgets. Abroad, producing nations that rely heavily on oil revenues for their budgets face serious pressures to cut spending.
Rising US Dollar. Since the middle of 2014, the dollar has appreciated about 15% against a basket of foreign currencies. Paradoxically, this weakens the US economy since it makes American exports more expensive, while also reducing the conversion of foreign profits from local currencies into dollars. Most economists agree that the dollar’s appreciation has cut the profits of the S&P 500 companies by at least 5%.
Meanwhile, the rising US dollar means increased debt servicing costs for countries around the world that have gorged on dollar-denominated debt in recent years, with historically low interest rates. I could write an entire E-Letter on this topic alone and probably will in coming weeks.
Fed Rate Hikes. The Federal Reserve is also contributing to the sense of dread in the markets. In December, the central bank finally hiked interest rates up from near zero for the first time since 2008. The increase was tiny, but it signaled that the days of easy money that fueled the post-recession bull market were officially drawing to a close. Some are concerned that if the Fed continues to raise short-term rates, it could also slow the economy substantially.
In addition, higher US interest rates are likely to drive the US dollar even higher. When things go bad in the world economy, investors turn to good old American assets as a safe haven, driving up the value of the dollar. When the Fed raises interest rates, that also attracts more investment to the US, driving up the value of the dollar even more.
The Fed says it wants to hike short-term rates four times this year – but I doubt they will in light of the latest market meltdown. The first Fed policy meeting of 2016 is this Thursday and Friday.
Consumer Spending Wobbly. Consumer spending accounts for apprx. 70% of US GDP. Retail sales declined slightly in December and rose by only 2.1% in all of 2015, marking the worst year since 2009. The decline in December sales came as a surprise since we were led to believe by the media that holiday spending was stronger than expected. Retail spending growth has been in a downtrend, despite the windfall of sharply lower gasoline prices.
Protectionist or Socialist President. This one is admittedly a stretch as a reason for the stock market