U.S. ECONOMY HEATS UP AND THE MARKET RALLIES AS INVESTORS STAY UPBEAT
With the Dow attaining the year’s highest close on August 18th and Nasdaq following suit the next day, neither the worst power outage in U.S. history nor terrorist blasts overseas deterred the markets as August drew to a close. Positive economic news trumped jitters about geopolitics as investors saw solid signs of an economic rebound.
Good news from the housing sector continued though August, too, and major indices provided a positive boost to investor optimism. The S&P 500 gained 15 percent in the second quarter—its best performance since 1998-- and blue chips continued a strong run after logging a 14-month peak of their own. Housing starts gained 1.5 percent in July –their fastest pace in 17 years--though experts forecast that this “hot” sector may be cooling down and note that building permits declined 2.4 percent in the same time period and that rising interest rates are putting the brakes on the refinancing business. Optimism on the street was buoyed by data that suggests that the sluggish job market –consistently the weakest link in the U.S. economy-- is showing signs of life.
Based on recent news and reports, many experts believe that the U.S. economy-- spurred by tax cuts and easier monetary policies-- is now growing at an annual rate of 4-5 percent. Bulls believe that the factors noted above -- plus the effects of a weaker dollar-- are combining to create a tremendous stimulus for the U.S. economy. They forecast recovery and renewed optimism and confidence in equities. On the other hand, the bears urge caution. They note that trading has been choppy and trading volume light throughout the summer months, and many suggest that the current rally, which began mid-March, might have come too quickly. They point out that investors remain skittish in the face of sporadic bad news, citing the decline in technology stocks following the sluggish earnings report from high tech leader Hewlett-Packard in mid-August.
Because the dollar is weak, the bulls see key opportunities for investment in companies with strong overseas sales. Many expect the dollar to decline by a further 10-15 percent. A weak dollar means U.S. goods are cheaper overseas, and that should provide a good boost in sales figures for U.S. based corporations. Economists note that a soft dollar in the ‘70s was responsible for a 20 percent surge in corporate profits. Currently U.S. companies derive about a quarter of their profits from markets overseas, which suggests that a nice boost to the bottom line may be in store for companies with global markets.
It sounds promising…but-- if the falling dollar scenario pans out--which companies are most likely to reap the bottom-line benefit in overseas sales? Many money managers and investment strategists are steering their clients towards consumer staples and away from airlines and automobiles –sectors that traditionally have benefited from a falling dollar but currently are struggling. Technology companies usually gain business when the dollar is low, but many analysts do not see a lot of additional value potential in tech stocks and are steering investors to consumer goods.
Why consumer staples? Because in tough economic times, consumers still buy the basic consumer goods they need—products like food, household supplies, and personal care and toiletry products.
In all eventualities, the experts, who anticipate increased overseas profits, urge investors not to expect sales growth and profit upturns immediately. They believe that a recovering economy and a weak dollar create fertile ground for profit growth for global enterprises, but counsel patience, noting that although benefits will start accruing to the bottom line in the fourth quarter, the real impact of overseas sales on corporate profits will not register until next year.
On the other hand, the naysayers are not so sure that a softer dollar will prove to be such a powerful sales stimulus for U.S. goods overseas. They believe the general economic malaise in Western Europe may stall consumer spending to such a degree that it will inhibit the advantages of a weak greenback.
Bottom line: The shadow cast by the long bear market appears to be lifting and investor optimism is on the rise. The flood of economic stimuli and the falling dollar are creating many new opportunities. Investment decisions—as always-- should be based on your circumstances and tolerance for risk. Careful research and judicious use of professional investment counsel are always a good idea.