Although it has taken over seven years, the S&P 500 INDEX recently broke through and surpassed its high from the year 2000. However, U.S. stocks took a beating this past week, because-well,-THE ECONOMY IS DOING TOO WELL.
Why would there be a sell-off in the stock market if the economy is doing well? I know that doesn’t make any sense to most investors, but this is the reasoning. Most economists and Wall Street insiders thought that slowing corporate earnings, the sub-prime mortgage debt crisis, and slowing real estate and new housing markets would force the Federal Reserve to lower interest rates. And lower interest rates are usually good for the stock market.
But the strength in global markets has surprised everyone (EXCEPT THOSE OF US AT FOXHALL CAPITAL) and that strength in global markets continues to make the U.S. economy stronger.
Unemployment remains low, real wages are going up, corporate earnings are stronger than expected and it looks like the real estate and housing markets are headed for a soft landing.
All in all, the economy is in better shape than most economists projected. That also means that we might see more inflation in the future. It is now more likely the Federal Reserve won’t lower interest rates anytime soon.
The stock market didn’t like that at all, because the stock market likes lower interest rates and investors should be prepared for more volatility over the summer whenever any government report seems to indicate a potential rise in inflation.
The good news is that this is all short-term “noise” that most investors should ignore. In the short run the stock markets can irrationally bounce around based on various interim economic reports. But it is always best to focus on the long-term persistent trends in the economy as a wise investor.
History shows that in the long-term, the stock market always follows the economy. If the economy is going down into a recession, the stock market will go down too. But when the economy is doing well, AS IT IS RIGHT NOW, the stock market will always go up over the long-term following that up-trend in the economy.
Last Friday, Bill Gross, the manager of the world’s biggest bond fund, the $103 billion PIMCO TOTAL RETURN FUND, predicted that strong global growth will hurt long-term bond yields, which is generally good for the stock market.
He said, “The considerations on a longer basis have to do with strong global growth. We have recognized in the past few months at PIMCO that the world is going to keep on keeping on. Asian growth at close to double-digits in terms of that rate will influence production, yields and inflation on a global basis.”
As an alternative to bonds, emerging market currencies offer opportunities that are similar to fixed income investments, Gross said:
"As a bond investor, we tried to look for ways to invest in global growth that were bond-like. Emerging market currencies do that. Emerging market currencies which exhibit growth of 5% plus are the place to be if you’re in a bond world.”
Over the next three to five years, Gross said he expects the global economy to continue to grow at a pace between 4% and 5% as well as a mild acceleration of inflation, which together are “not necessarily bond-friendly.” However this is very good long-term news for the U.S. stock market.
We at Foxhall Capital agree with his conclusion that global economic growth in Asia and other emerging markets will continue to buoy up the U.S. economy and over the long-term drive the U.S. stock markets up over at least the next year or so. As I always say, “THERE IS ALWAYS A BULL MARKET SOMEWHERE IN THE WORLD."