What’s going on in the economy, anyway?
Oct 02, 2019
Fears of an upcoming recession in the US have popped up seemingly everywhere lately, with pundits announcing impending doom with uncanny certainty. The talking heads (who, remember, are paid for ratings, not accuracy of their predictions) have been stirring doubt all over the world. But there are many indicators to take into account when talking about the health of the market, and the reality is always more complex—and far less certain—than the evening news anchors let on.
Today, when people refer to “the market,” they mean the stock market, but that’s often measured by only a small subset of stocks: the Dow, S&P 500, or Nasdaq. That’s because these samplings provide easy indicators for the health of the US economy overall, and these are what the media tends to report on. However, it’s important to remember that these metrics give us only a snapshot, not the whole picture.
For example, let’s look at the Dow. The Dow is a price weighted index, comprised of only 30 stocks. This means that if one stock has a higher price per share than another, then it will affect the whole index. Due to the ongoing trade war between the US and China, the Dow has been fluctuating quite a bit lately. If China happens to raise tariffs, the US will do the same in retaliation, and this will affect the companies who manufacture in China directly—which happen to be overrepresented on the Dow. For example, if the stock prices for Nike and Boeing take a dive, the entire Dow will do the same, even though two isolated companies are hardly a fair sampling of the health of the entire American economy. This is only exaggerated since Nike and Boeing have higher prices per share. So even though the rest of the market may be up, if these companies are down, the Dow will fall.
The trade war with China certainly does have a broad impact on the health of the markets. China and the US are the two largest economies in the world, both heavily dependent on each other. The tariffs being placed on goods are undoubtedly affecting business in both countries, especially the United States, as we have such a large dependence on China’s imports. But in many ways, we’re in uncharted territory here. We haven’t seen a trade war quite like this one before, so nobody can say with certainty what the outcome will be. The goal of a tariff is to entice domestically manufactured purchases. However, tariffs may also just simply result in increasing prices of the imported goods. Most likely, we’ll see a mixed result, which will send both positive and negative ripples through the economy.
Despite this international turmoil, the US has really positive fundamental national economics right now. Personal savings is high, our GDP is strong, the price of oil is low (which means gas is low), we have very low unemployment, debt-to-income ratio is low, the real estate market is steady, and the stock market is on a positive growth trend. All of these indicators paint a very optimistic picture for future market health. The worrying parts of the market are what we call speedbumps. The trade war is one, international growth (or lack thereof) is another. Europe seems to be coming to a ‘slow stall,’ due mainly to GDP falling slightly. This decrease in growth has been led mainly by manufacturing slowdowns. Europe’s GDP dropped 1%, (Hannon, 2019) and ultimately, the US and China’s volatility are affecting the world economy in the same ways they’re affecting their own.
Perhaps the most interesting thing to keep an eye on is the yield curve in the US. The yield curve is a graph that shows the current interest rates and where they sit based on duration of bonds in the US market. Normally, it shows that short-term bonds carry lower yields, which is normal. The longer you commit to the treasury, the more you and your money will be rewarded. The yield curve can be very predictive of the future economy. It’s accurately predicted every recession in the US since 1950. Right now, our yield curve is flat and inverted. This means that the 10-year bond yield rate is below the 2-year bond yield rate. Historically, this means that a recession would be coming in 18 to 24 months, and this is the indicator people are talking about when they claim to have proof of an upcoming recession. Many people believe though, that today will be different because of the very unique situation the world is in. Outside of the US, markets are experiencing negative interest rates. This causes the outside world to rapidly buy US treasuries over foreign treasuries, so, as rates go Down, prices go up. This alone may protect us from entering into another massive recession.
The short answer is, there’s no reason to panic. Evaluating the state of today’s market is much more complicated then looking at any one measure. The market is always in flux and we are always searching for strong indicators of how to predict what’s coming. In today’s global economy, the US market is directly related to the international economy and foreign markets. The United States is in a distinct position and, while the global economy can seem unstable, the US is enjoying a time of growth and a healthy market. Regardless, the most successful investors are those who set a strategy and then stick to it, so they’re prepared for whatever’s to come.
And maybe turn off the TV.
“This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.”