Anyone that has been reading my weekly commentaries for the last several weeks and months shouldn’t be surprised by the recent market decline. Despite what you hear from the Wall Street system cheerleaders, the summer months were not a great time to buy stocks. And in my opinion, nor is right now.
I believe that the markets will move back and forth but that the trend for the time being will be down. That’s why, for the most part, I heavily positioned in cash and US Treasury Bonds (i.e. ticker TLT), with little to no exposure to stocks. In fact, I currently have a short position on in the S&P 500 Index (albeit a small one).
Why do I see the markets continuing to struggle? Because when the economy slows down it becomes harder for even the best companies to continue to grow their revenues and profits. And when companies can’t do that anymore, and instead start to see sales and profits decrease, it is only logical that the price of their stocks would decline. I believe that is part of what is happening now. Worldwide growth is slowing and in that environment stocks aren’t going to do well.
Granted, we’ve been in a slow-growth world for several years, but the struggles are mounting and there aren’t any easy answers to fix them. Worldwide we are fighting significant demographic trends that should result in less consumption. As people move into their retirement years they tend to consume fewer goods and services. That trend is going to continue for years creating a headwind for the markets.
This slowing of growth has been exacerbated by governments and central banks that continue to follow a low interest rate/debase the currency playbook that has been followed by Japan for the last 35 years WITHOUT success. But hey—maybe this time it will work (I’m being sarcastic)!
Worldwide we are experiencing deflationary pressures. In a deflationary environment stocks go sideways to lower and companies start to downsize. Unemployment slows and so does the economy. That doesn’t mean that we are in a recession (yet), but (for example) if growth was at 3 percent and now is only at 2 percent, then it feels like a recession. I made up those numbers (sort of like the way the Federal Reserve seems to make up their GDP forecasts)—the actual GDP for Q3 or Q4 of this year probably won’t have a 2 in front of it. It may not even have a 1 in front of it—yet the Wall Street ‘experts’ continue to preach that all is good and it is time to buy stocks on the dips. The problem is that in a deflationary/slow growth environment that cheap gets cheaper.
That brings me to the Federal Reserve.
