United States will lead the world in an economic global recovery, but it will not happen anytime soon; at least not for several quarters or potentially longer.
Stock Market Higher or Lower?
With it being a Presidential election year, it makes it a tough call for a decline in stocks since they typically rally. Besides it being an election year, this, is no ordinary year with all the issues in the EU and the global economies slowing. My belief is in time, reality sets in and we get a significant price concession in stocks to reflect the slow growth or no growth environment we are in and really have been in for the last several years. Don’t forget, the S&P 500 derives over half of their gross earnings from abroad.
If the Federal Reserve engages in more QE (Quantitative Easing) or easy money policy, it will only prolong the process. The only thing QE has done has been to artificially lift stock prices which has been their main goal. Let’s face it, QE has done nothing in the way of creating jobs or anything for the real economy. All I can say is, let’s hope the worst case scenario does not play out in this economic cycle as it did in 2008.
Real Economic Trends
It amazes me when I hear pundits call for the economy to recover in the second half of the year, but back it up with nothing factual. To me, this is nothing more than delusional thinking. As for the realistic economic trends, they are pointing down and will persist in restraining growth for at least the next 2+ quarters. There are just far too many domestic and EU issues to contend with and I think at some point all analysts will be forced to come to that sad but true realization.
Stop and think about it, China determines the fate of Asia's economies now; and the Shanghai Index has plunged over the last three years. The Shanghai market, is the leading indicator for Asia, not the South Korean or Australian markets as many like to think.
Similarly, Europe's economy will ultimately be driven by what happens in Spain and Italy (as strangely as it might seem) and not by Germany or France. What occurs in Spain and Italy will absolutely have a domino effect upon “core” Europe and even the U.S. as we get the spillover effect.
The real economic trends point to lower and slower growth.
Fighting the Fed?
Typically, one has been told never to fight the Fed and I agree with that. However, here at PSTL, as we mentioned before, we think the stock market will experience a significant price concession at some point before we enter a new bull phase and actually believe at the present time, the Fed is fighting the markets as they attempt to force stock prices higher or at least hold them for now. Essentially, they are forcing everyone into stocks since there is no yield anywhere else and they are doing this at the expense of savers.
While the Federal Reserve will not come out and say this, they are hoping the economy does not improve dramatically anytime soon because they want to refinance our National debt at longer dated maturities; thus the need to keep rates low for an extended period of time.
Will the Presidential Election Matter?
The big debate is will it matter who wins the White House in November and while it may in some regards, the reality is, it probably does not. I say this because my belief is regardless of who wins the Election; Budget cuts will take place, the current account deficit will get cleaned up over the ensuing two years and we will be well on our way to having fiscal balance. You might ask why? The answer is real simple, what’s the alternative?
The bottom-line is the jig is up and this time around Washington finally knows it and gets it. Stop and think, never before have all the global financial and economic systems been shaken to their very core.
To the surprise of many, I think it will be the U.S. economy priming all pumps and leading the world out of this global mess; not Europe, Japan, or the powerhouse of “China”, which everyone assumes.
However, before we get there, we will first have to endure more pain. It is a fact, that since the trough of the financial crisis, global economic fundamentals have not gotten better; they have actually gotten worse around the world.
With the three leading markets of China, Italy and Spain being in brutal bear markets and showing no signs of slowing, I cannot be sold on our stock market holding. I do believe we will see significant price recessions before the next real meaningful bull phase.
It would be nice to think that the stock market could remain resilient; but to me, logic dictates this will not be the case due to the ongoing issues in Spain, Italy and the Chinese economic slowdown.
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