Simpleecon Release on 4-30-18
Hello, I am Bob Gray, and this is Simple Econ. It has been a wild ride as of late. The noise levels are far exceeding the common sense levels, and that has the markets very volatile as they are currently guided by fear and fear alone. Let's take a lot at what is really going on in the markets and our economy.
There is no doubt that fear has taken hold of the U.S. markets. Volatility reigns supreme as there is fear of trade wars, fear of dubious tech companies profiting off of personal data as if that was not really common knowledge, fear of well-intentioned government regulations beginning to choke the entrepreneurial spirit, growth, and profits of the technology sector, a sector that has been a major part of both the U.S. job growth and the U.S. economic growth over the last 30 plus years and especially through the recovery from the Great Recession.
The U.S. tech sector is a major part of the U.S. economy and represents about a third of the market value of the S&P 500, and that does not even include the trillions of dollars a private investor, be it individual, small consortiums, hedge funds, private equity firms, pension funds, sovereign wealth funds, money piling into private equity ownership of privately held tech firms along with more and more privately held firms in other areas of the economy.
The intellectual property of all these companies represent the global leadership in what will become an even faster growing growth engine for the U.S. economy. Remember, it was not that long ago that volatility first spiked up over concerns of a nuclear war with North Korea.
As volatile as the markets have seemed over the quarter, we're still experiencing below average volatility when you look at the VIX or the Volatility Index, which is called the VIX.
Let's take a very quick look at what is going on with each of these fears.
First, trade wars. Yes, there is a lot of negotiating going on around the world: NAFTA, China, Britain, France, European Union, South Korea. The negotiations have a lot of negative story being posted every day about all the U.S. companies that could, (could being the key word), hurt if negotiations were not successful. But this is also true with the other companies and governments that we are negotiating with, and remember, the U.S. buys more from most of these countries than we sell to them, so who is more dependent on who in these negotiations?
Of course, the U.S. wants to keep free trade going around the world as it is in all of our interest to do so as long as it is truly free and fair to all. The main issue with China is the theft of U.S. intellectual property. This is no secret and has been going on for a very long time. They know it, and we know it. It is the best interest of all to work these issues out, and, as all have a stake in it, my guess is it will be worked out faster than we think it will.
Tech companies most likely will see more regulation, but the recently released numbers from Facebook showed an incredible increase in people joining Facebook and using the product, which increases the value and price of advertising on Facebook, which increases their sales and profits.
Now to leadership in the markets. Earnings and the ability to share in the growth and earnings of various companies is the reason why anyone bothers to do all this work around trading in the U.S. and global equity, debt, currency, and commodity markets. The S&P 500 companies were expected to see a 17.3% earning growth rate. If a 17.3% or higher growth rate is realized, it will mark the highest earnings growth rate since a 19 and a half percent rate in quarter one, 2011.
Sales for these companies has also been trending higher over the last year as the economy has grown. This makes it easier for companies to increase earnings, and it is a whole lot better for all concerned to deal with more sales than increasing profits totally by managing the PNL.
Manufacturing and service companies are all showing strong growth through the ISM surveys. Wages are growing, consumption is holding up, and business investment is increasing. There's a lot of fear about running out of people to hire, but we still have people entering the workforce from immigration, aging in, or coming off the sidelines to participate.
Since business investment is finally showing growth, this will help the economy grow by increasing productivity, which has been slow to flat for the last couple of years. Increasing productivity takes the pressure off of employment growth while increasing overall economic growth.
The U.S. economy still has a couple more quarters of decent to strong economic growth left in it until it starts going comparable against the last three quarters strong growth, but business is used to always going comparable against past sales and profits. The American business world, whether mega corporate or small business, goes to work every day to improve and beat the comps. That is not going to change. There is so much positive going on in our economy and innovating ideas and products coming down the line. The moments in time might slow it down at times but not stop it.
Thanks for taking a few minutes of your time to watch this short video. I will be back when something changes or, at the least, toward the ends of the earnings reporting season. Be well.