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Beneficial Bank January 2016 Market/Economy Commentary

The stock markets don't necessarily reflect the condition of the domestic economy and that seems to be the case right now.


In a nutshell: "The stock markets don't necessarily reflect the condition of the domestic economy and that seems to be the case right now."

The equity markets are not behaving very well. Indeed, the year has begun with the largest declines ever and on the surface, that seems to point to an economy that is faltering. But is that the case? No, as very little has changed since the calendar turned from 2015 to 2016. And that is a reminder that Wall Street and Main Street don't necessarily move together.

What most of us should remember is that periodically, the stock markets go on wild roller coaster rides. Most investment advisors tell people that it is hard to pick market tops and bottoms, so staying the course is usually a good strategy. But everyone is different when it comes to the willingness to take risk, investment goals and time horizon, so one investment shoe doesn't necessarily fit all investors.

As for the economy, quarterly growth rates also bounce around sharply. But the trend in economic growth rarely changes dramatically unless there is some shock. Has there been an economic surprise that could cause the economy to suddenly fall into recession? Not really.

The one major uncertainty, when it comes to U.S. growth, is the state of the Chinese economy. Their data have been suspect for years and now it may be catching up with them. Basically, we really don't know the true condition of the Chinese economy. All we know is that it is slowing.

Thankfully, it is not likely that a Chinese economic moderation could derail the U.S. economy, which has been growing at a moderate pace for the past five years. Our exports to China constitute only 0.7% of GDP, so any softening in sales would not affect total U.S. economic growth significantly.

But a softening in Chinese activity could affect corporate earnings. The profit prospects for companies dependent upon China are now more uncertain. And falling earnings or earnings expectations lead to stock price declines, even if they mean nothing for the U.S. economy.

The risks to earnings also depend upon the type of company that is doing business in China. One reason for the Chinese slowdown is that it is transitioning to a more consumer dependent economy. But that means more consumer spending in China, so firms that supply products to Chinese households could actually do better. Just saying China is slowing misses the important point that some companies will actually benefit from the changes going on there.

A second reason the markets have faltered is the continued collapse in the price of oil. Yes, oil companies and the firms that supply them with goods, machinery, equipment and services are hurting. Sales, investment and employment has dropped sharply. But seriously, wouldn't the economy be better off in the long run with $2/gallon rather than $4/gallon? The short term negative impacts will dissipate, but the benefits will be persist.

So, when we sum things up, the U.S. economy is continuing to grow at a moderate pace. Consumers are buying motor vehicles, homes and all types of products. Firms outside the energy sphere are expanding and even governments at all levels are spending more. And critically, most investors have learned to either not look at their 401k's or not overreact to market volatility. Consequently, confidence and spending has not been greatly hurt by the equity market downturn.

Wall Street may be having problems, but Main Street is doing better and that should continue.





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