Stock Market Anxiety: It’s The Federal Reserve
Gary Gordon | Nov 01, 2016 03:17PM ET
The financial media rely heavily on advertising sales from financial firms. Conflict of interest? Possibly. If scores of folks make “risk-off” adjustments to portfolios such that the demand for riskier assets (e.g., stocks, low-grade corporate bonds, etc.) falls of a cliff, Wall Street corporations may lose hundreds of billions in asset management revenue. And if investment companies struggle, the financial media will see a sharp decline in the advertising dollars necessary to turn a profit.
For the most part, then, you may wish to bypass the spin that reputable outlets place on the attractiveness of the stock market or the health of the economy. You’re primarily going to get headlines that cement a notion that the economy is fundamentally strong or that the stock market is essentially safe. (At least for the long haul, right?)
The latest example? Mainstream media commentators, writers and analysts expressed jubilation over the recent report that the U.S. economy expanded 2.9% in the 3rd quarter. Virtually none of them looked beneath the surface of the number. Even fewer questioned the sustainability or viability of the data itself, let alone acknowledged that the data will witness two more revisions before being finalized.
As the table above shows, two-fifths of the annualized GDP growth (1.2%) came from exports. This happened while the U.S. dollar was rising substantially during the 3rd quarter? When exports became significantly more expensive for importers? When global demand for U.S. products has been anemic? Color me skeptical.
If one digs a little deeper, according to the U.S. Bureau of Economic Analysis, goods exporting accounted for $41 billion of the $119 billion in economic growth. Were these exports across a wide range of products in a wide range of industries? Hardly. It came almost exclusively from a one-time agricultural lift.
Equally worthy of note, $38 billion of the $41 billion in exports came from a single agricultural product: soybeans. In other words, absent an enigmatic single shot from the exporting of a single agricultural product, GDP growth remains relatively tepid.
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Still not sure? Consider the year-over year change in GDP on a rolling 4-quarter basis. The rolling 4-quarter peak occurred in the 2nd quarter of 2015.
Not surprisingly, perhaps, the S&P 500 has not made progress since May of 2015 eighteen months ago. Moreover, the 2130 level that once served as resistance to upward movement – a level that has more recently served as technical support – is beginning to crack.
The financial media may choose to blame it all on election anxiety. The problem there is ignoring the reality that the broader New York Stock Exchange Composite (NYSE) is actually down several percentage points over the last two years.
A more potent take is the reality that the Federal Reserve stopped expanding its balance sheet in the tail end of 2014. Ever since? Stock assets have, for the most part, struggled to make meaningful strides.
It may not get any easier going forward. Consumer sentiment also peaked near the time that the Federal Reserve stopped expanding its balance sheet in the tail end of 2014.
Small business optimism? Yes, you guessed it. Small businesses have grown increasingly troubled ever since the Federal Reserve called an end to the creation of electronic dollar credits for the purpose of buying assets (QE3) in the final quarter of 2014.
In essence, since the Fed stopped creating electronic money to expand its balance sheet, consumers and businesses have become cautious. And, by extension, consumers and businesses may not like future prospects until they become convinced that the Fed will not inadvertently bring on recessionary pressures.
Granted, economic moderation occurred in 2011 as well as 2012. One could make a claim that the recent economic slowing is similar to what occurred in earlier years. However, the Federal Reserve responded to economic slowdown concerns in 2011 with “Operation Twist” and ultimately pushed back recessionary pressures in 2012 with the introduction of “shock-n-awe” QE3 stimulus. Today, the Fed is gearing up to slightly tighten overnight lending rates with a face-saving year-end 25 basis-point hike.
Should investors be concerned? Perhaps. Consumer purchases in the recent quarter grew at half the pace (1.5%) of the prior quarter (2.9%). The influential Empire State manufacturing survey declined in October. And corporate investment in equipment has now declined for four consecutive quarters.
Bottom line? Neither the economy nor the stock market are in as good as shape as the financial media would have you believe. I continue to advocate having 25% in cash equivalents to reduce portfolio volatility as well as provide the “dry powder” needed to acquire assets at considerably lower prices.
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