The stock market has rallied for two days, with the S&P500 back at 1987 from its low of 1869. It’s still down 6.8% from its peak of 2130, set in May, (and nearly matched just a month ago) and down 3.5% for the year. It’s almost like the crash never happened, right?
Well, no. But there is a lot of good news for the underlying economy, some of which came in this week. The really good news is still out into next year, which is essentially forever to this market. We have to get over an interest rate hike, which will definitely come this year no matter what you read elsewhere, and a lot of jitters.
Let’s start with the bad news, since that’s how the week started. The convulsions out of China are starting to be ignored by other stock markets around the world, but they are far from over. Before this is done we can reasonably expect the Chinese Central Bank to lower interest rates further, currently at 4.6%. This will weaken their currency and continue to spook markets just as it did last week.
There is still the question of corporate profits, which are relatively low – down from an all-time peak set just two years ago, a ridiculous standard. But the overall price to earnings ratio (PE) of the S&P500 is still at 20, which is hardly the signal for the start of a bull market.
Lastly, investors are still nervous after all this. The Volatility Index (VIX) remains high after bouncing off a “Hang on to your guts” 42 on August 24th. At 26, it implies there is a 66% chance the market will go up or down 26% in the next year. Popularly, it’s taken as a good measure of anxiety in the market.
There seem like a lot of reasons to stay out of the market, but the positives are huge. The first revision for Gross Domestic Product (GDP) for the second quarter of the year (2Q15) came in at a stunning 3.7%. That comes after William Dudley, President of the New York Fed, called a rate increase in September “less compelling”.
Strong growth and cheap money? Can it get better?
Oh, yes. If you leave out the part of the economy dedicated to exploring and drilling for oil, the net expansion in 2Q15 was a stunning 4.5%, the highest since 2006. More interestingly, the collapse in this field of 68% means that the bloodletting is already over and 3Q15 might indeed come in over 4% unmodified. This includes a strong growth in consumer spending, the last thing to revive at the end of this Depression, which grew 3.1% – the highest growth since 2008.
It’s worth noting that with 1Q15 only showing 0.7% growth, some of this may be a bad “seasonal adjustment” in the figures. But it still looks good no matter what.
The good news extended to jobs, where new claims for unemployment insurance (Initial Claims) fell below where they were before the Depression started in 2000 at 266k (4 week average). That doesn’t mean that companies are hiring, but they are definitely not firing.
Indeed, business investment is up significantly in the GDP figures, 3.2%, which explains why corporate profits are down. That investment won’t pay off until at least some time in 2016, but the investments are being made.
On top of all this, now that the dust has settled we can see where things stand around the world in currency exchange. The US Dollar will today only buy you €0.89, down from its peak of €0.95 last April. It’s still a lot stronger than last year’s €0.77, but our goods are not as expensive as they were – and the rise has certainly stopped.
How good is the leading economic news? Even the worst threat of all, an interest rate rise, has a strong potential of turning into a net drop as interest rates around the world start to harmonize a bit.
It’s still hard to see the stock market suddenly getting its resolve and pushing back to where we were just a month ago even with all this good news. After all, the best news looks good years out and the stock market has become notoriously short sighted, hardly an indicator of anything in the future.
Still, most in the US have their retirements invested in this nonsense and over the very long haul it does have to reflect at least something in the underlying economy. Now that the drama appears to be over it’s best to ignore the daily bumps and feel confident that something good may indeed be coming.