WASHINGTON – The US stock market, while not doing great, is still up. And yet the US economic outlook is not that good anymore. In fact it is getting worse. So, why the continued confidence in fairly expensive stocks? This is a mystery to me.
Here are some alarming figures. As reported by the WSJ, US corporate profits are down. In the third quarter they declined 1.1% from the second. But compared to the same period last year they are down 4.7%. This is a bad trend, and it should be noticed by investors.
Domestic profits fell by 2.8% from 2014. More significantly, profits derived from foreign operations fell by 7.4% compared to 2014. Several analysts quoted by the WSJ expressed the opinion that the US economy –and exporters in particular– has been hit by a global slump that is not going away.
Oil doing badly
On top of this, the US oil sector is in a horrible situation. Oil prices are less than 50% of what they were more than a year ago. Some energy companies that had invested heavily in shale oil may survive even with drastically reduced profits. However, extracting oil from shale is expensive. It made sense to invest in this once booming sector when oil was up at $ 100 a barrel. But now it is at $ 40. Therefore expect more jobs losses, bankruptcies and consolidations in this once thriving sector. Certainly no major contribution to overall economic growth from oil in the near future.
A global slump
Around the world, wherever you look, it is mostly bad news. Europe’s economies are doing poorly. In fact, the European Central Bank, ECB, is contemplating more Quantitative Easing, QE. Japan is also stuck in a low to zero growth zone. Brazil is in a recession made worse by a huge political scandal. Perennially mismanaged Venezuela essentially imploded. Saudi Arabia is running serious budget deficits. Russia is also in a recession. Argentina, now under new management after the election of Mauricio Macri as President, will have a tough time extricating itself from the consequences of the disastrous economic policies of his Peronist predecessor.
Most of Africa has been hit hard by the collapse of commodity prices. Therefore, do not expect much new demand from there. China is slowing down. As a consequence, all China’s suppliers, from South Korea, to Chile and Australia, are suffering because of falling exports.
None of this looks good.
(And I am not even going into the scenarios of possible economic crises stemming from the simmering conflicts in the Middle East, with ISIL, Assad, Iran, Russia, Turkey, Iraqi Shia, Kurds, and what not engaged in an endless battle. And what about a possible flare up of the underlying tensions between China, its neighbors, and the US emerging from China’s expansionist policies in the South China Sea?)
Do US stock investors seriously believe that the US will not be affected by these global negative trends? All alone, the US will power ahead, while the rest of the world slows down, or worse?
Lower consumer spending
And, to make matters even worse, US consumer spending, the main driver of GDP growth, is also slowing down. It had increased by 3.6% in the second quarter, and it is now down to 3% in the third.
As I said, with this rather uninspiring picture in front of them, I do not see why US investors keep buying overvalued stocks.