So much economic data is released every week, it makes your head spin. You’re sitting there thinking, “Man, they throw a lot of economic data at us every day. How do I decide what’s important?”
Well, leaning on some recent observations by veteran analyst Bert Dohmen, here is a quick primer.
Credit Growth is the most important indicator of the future success of the economy. Everything else follows. Right now, credit is contacting. There are a hundred ways to show this, but here’s a quickie: Total revolving credit outstanding has been declining steadily since the early part of the recession, as you can see in the chart above.
Job growth, the second most important economic factor, is dependent on credit growth. If there is no credit growth to help small businesses expand, then there will not be any real job growth.
Consumer spending is the third most important factor to watch, and it is dependent on job growth. If there is no job growth, then spending growth comes primarily from people who already have jobs feeling more optimistic and splurging. These are the people buying so many Android, iPhone and iPad devices, and filling ritzy urban restaurants. When confidence falters, spending will decline and that will impair earnings growth and stocks. As you can see in the chart above, consumer spending recently has crossed down below the already anemic levels of 2009, according to Gallup.
Consumer sentiment is the fourth most important factor, and is dependent on ample job growth and credit growth. These stats are released monthly in the form of surveys. When sentiment grows more cautious, as it is now, spending suffers.
Summing up: At the moment, we know that credit is contracting and jobs growth is stagnant. We also know spending is down, and if you look at Rasmussen and Gallup surveys you will see that consumer confidence fell for the third straight month in August due to lower expectations for the economy.
When people feel worse about the future, they lower their intentions to buy stuff, which in turn is picked up by companies trying to figure out how much inventory to stock. The latest surveys show that 26% of consumers reported that they are planning to reduce their overall spending in the month ahead, a 3-point rise from June and the highest number reported since January. Lower inventories in turn lead to lower orders, and more layoffs.
The bottom line is that the third quarter is not shaping up to be any kind of barn-burner, so regardless of the sour seasonality of September and October it is certainly beginning to look that price/earnings multiples may have to be taken down a notch to reflect the likelihood of weaker and more volatile earnings in most industries. This will lead to lower stock prices even if nominal growth only slows down a little.
Action Item: This is why I continue to recommend that investors focus on utilities, high-yielding defensive stocks, investment-grade bonds, precious metals and the overseas ETFs. You can make money in this environment, but it won’t be in the typical growth stocks and small-caps favored by mainstream mutual fund managers.
Stepping back a moment, let me just add that I am an optimist by nature, and am looking for reasons to be constructive on U.S. stocks. And getting past all the data, reasons to be excited about the future abound. This afternoon, I drove my 15-year-old daughter and four of her friends to the second of five days of high-school soccer tryouts. They were nervous about making varsity, but all are well-trained and well-conditioned youth athletes, and know they are prepared.
Their fun blend of focus and giddiness is infectious, and you just can’t help but be eager to see how they can remake the world in their buoyant image over the next 50 years. As parents, we need to invest wisely to make sure that we can help them fulfill their dreams, so never give up on this task. Stay in synch with me in the second half; we’ll get through the coming rough patch together.
For more ideas like this, please check out Jon Markman’s daily trading advisory service Trader’s Advantage, or his long-term investment letter, Strategic Advantage.
Triple-Digit Profits No Matter What the Market Does – You are not at the mercy of the markets. You can start adding triple-digit winners to your portfolio now if you’re ready to embrace the new rules of investing. Here’s how to make money every day in up markets AND down.
