The economy is primarily analyzed using the Gross Domestic Product (GDP) and employment levels. The GDP is a measure of all the goods and services produced in an economy. Economic growth is when the current and future periods of time are experiencing an expansion in GDP. As businesses increase their sales and are more confident about future activity, they hire more people. The new hires are more confident about their future and spend a portion of their income on business and the cycle continues. The stock market usually leads an economic recovery, because stock investors look to the future. If investors foresee an economic recovery 12 months from now, they will start to accumulate shares in companies that will benefit.
There’s one point that I cannot stress enough in this column, and longtime readers are sure to know it: consumer confidence is extremely important for economic growth here in America.
It’s simple logic. Because so much of our economy is built on domestic spending, without an increase in consumer confidence, consumer spending will languish and we won’t have higher levels of economic growth.
Recently, new information from the Conference Board was quite disappointing. The Consumer Confidence Index dropped to a seven-month low in November to 70.4, following a decline in October as well. (Source: “Consumer Confidence Declines Again in November,” The Conference Board web site, November 26, 2013.)
Over the short term, consumer confidence declined due to people stating their concerns regarding a weakening of economic conditions. What’s more concerning is that the expectations for the next six months worsened, as people stated they were increasingly worried about their job prospects and earnings, which isn’t a surprise considering the data hasn’t been all that positive lately, especially when it comes to wage growth.
If consumer confidence is turning pessimistic over the stability of jobs or paychecks, how can we really expect the average American to increase their spending or businesses to feel more confident in expanding?
This type of uncertainty leads to slower economic growth. If you are unsure of your financial health over the next few months, chances are you won’t increase your spending, and a lower level of consumer confidence leads to muted economic growth.
Clearly, one market sector I am worried about is that of companies catering to the average American.
Chart courtesy of www.StockCharts.com
Target Corporation … Read More
The more I view this stock market, the more nervous I get. While Wall Street gets set for some terrific year-end bonuses and investors take some amazing gains off the table, I’m sensing some euphoric buying in numerous areas of the stock market.
We saw what happened to hydrogen-cell car maker Tesla Motors, Inc. (NASDAQ/TSLA), as the high-momentum stock rocketed to $194.50 on September 30. The euphoric buying was clearly overdone and set for a nasty decline as short-sellers jumped in. Fast-forward nearly two months, and the stock has plummeted 38%, sitting at the $120.00 level as of Friday. And while some are blaming multiple engine fires in several Tesla cars, the reality was the stock simply accelerated much too fast on the chart to levels that were clearly unsustainable. Even now, trading at 80 times (X) its estimated 2014 earnings and with a price-to-earnings growth (PEG) of 11, the valuation is obscene.
Areas that I view as having some excessive run-ups and valuation in the stock market include the Internet services and social media sectors, which include such stocks as Facebook, Inc. (NASDAQ/FB), Twitter, Inc. (NYSE/TWTR), and Netflix, Inc. (NASDAQ/NFLX). These high-momentum stocks are excessively priced by the stock market, so investors should be wary of chasing them higher. As an alternative investment strategy, wait for the stock to come to you; in other words, wait for weakness in the stock market and for prices to decline before jumping into these investment areas.
The cloud services area in the tech sector has also seen some massive advances to the point where there is so much hype built into the … Read More
After so many years following the Great Recession, it’s still quite astounding that job creation remains so slow. This obviously indicates the lack of economic growth, even after trillions of dollars have been pumped into the U.S. economy.
While there has been a lot of optimistic talk in the mainstream media, there have been an increasing number of data points indicating America’s economic growth is still very fragile.
Recently, the Federal Reserve Bank of New York released the results of its November 2013 “Empire State Manufacturing Survey,” and they didn’t support the economic growth theory.
This report is an indication of the state of manufacturing in New York. The net result is that overall business conditions fell to their first negative reading since May. New orders also fell 13 points into negative territory at -5.5. Labor conditions worsened, indicating a decline in the average number of hours worked per week. (Source: “Empire State Manufacturing Survey,” Federal Reserve Bank of New York web site, November 15, 2013.)
It’s no wonder that job creation is still lagging: the manufacturing industry is still experiencing a lack of economic growth. In fact, these results indicate that manufacturing is beginning to weaken once again.
We can’t have economic growth if large sectors of the U.S. economy are experiencing a decline in business activity.
On top of the decline in manufacturing, the level of prices paid is beginning to increase to a level above what firms are able to charge clients.
In 2013, prices paid by manufacturing firms increased 3.4% on average, and they are expected to increase four percent in 2014. Manufacturing firms estimate that … Read More
I’m calling it; that’s enough talk about Janet Yellen and the Federal Reserve’s likely strategy to continue printing money until the economic renewal picks up steam.
America has spent trillions to save its housing, financial, and auto sectors, and in the process, it has likely crippled the future generations with its massive build-up of national debt.
Yet at the same time, across the Pacific Ocean, China has seen decades of economic growth that has driven the country to surpass Germany and Japan to become the second-largest economy in the world, trailing only the United States. But unlike good old America, the Chinese have also managed to build up reserves of over $3.5 trillion.
And while there are still many in the United States who dish on China, I’m not in that camp. Having traveled to China, I can tell you the growth there has been staggering and it is reflected in the building of massive super cities that make New York City look small.
The money and wealth creation in China from the rural areas to the urban centers has driven the domestic consumption, and I expect this trend to continue.
And while the focus here was on the Federal Reserve and its suspect quantitative easing strategy, the Communist Party in China was meeting to discuss the future of the country.
At the core of the massive reforms in China will be major changes to its current policies as the country gets set for what will likely be another 20 years of growth superior to the United States and other Western countries. China doesn’t want its economic engine to stall…. Read More