Oil, GDP, QE and September
We ended August with the Dow lower for the month by about 4.5%, the S&P off by about 3.1% and the NASDAQ essentially unchanged. All three remain up nicely for the year. (1) The only thing that can be determined by these results is that it was summer.
Oil prices
Bottom line, supply and demand have little to do with the current crude oil prices. These had been run up by traders during the month, based on a lot of “what if-ing” about what conflict with Syria could mean. While Syria, of and unto itself, is pretty much a non-event in terms of direct oil production, (32nd in the world, according to the International Energy Agency), it’s the “what could happen” syndrome that motivated the traders. Their trades are fear-based, in that they want to buy now before any military action would/could cause higher prices due to a potential spillover involvement of Iraq and the Strait of Hormuz. Based on recent lack of any decision to” punish” Syria, the oil prices have backed off somewhat.
World oil – and US gasoline – prices are driven primarily by the price of Brent (North Sea) crude. This is the benchmark that sets the pace for daily prices. What’s keeping global prices up is labor issues in Libya and Nigeria which have slowed supplies. Libya produces 10 times the roduct that Syria does.
Here in the US, according to Dr. Mark Perry, our imports of crude are the lowest since 1987. (For clarification, a third of our foreign imports are from Canada and Mexico.) Additionally, US crude output through July is at the highest since 1988.
The point is, thanks to the shale revolution, our reliance on foreign oil is trending in the right direction. Currently, prices are being driven more by political issues than the market, per se. Be prepared for more volatility for a while…
Second quarter GDP, take 2
Because of how the data are reported, the final, no kidding, we really mean it this time, figures for how a previous quarter’s GDP did aren’t official until the end of the month just before the start of the next quarter. Interim figures are reported at the end of the preceding two months. So, this past week, we got the second revision of last quarter’s GDP. They were, to use the phrase, much better than expected.
The Commerce Department said the second quarter grew at an annual rate of 2.5% v. the initial rate of just 1.7%. The expected rate was 2.2%. The main reasons for the better results were that our exports and domestic business investment figures were revised higher. These are both significant in that they indicate improving global markets, together with a positive long-term view from businesses as they invest for future growth.
Included in the report was information that corporate profits grew over 16% in the quarter and are now up 5%, year-over-year.
These kinds of data aren’t the sexy things that grab sound bites and headlines. They’re much more important than that. These facts can give you confidence that the economy has strength and is still growing. Together with the corporate profits numbers, the combination definitely suggests to me that there’s more upside in the shares of good quality companies as these data are realized through improved market growth and earnings per share.
QE
This GDP is the last the Federal Reserve Open Market Committee will see before their next meeting later this month. The GDP report, along with the steadily improving employment picture, suggest to me that some degree of reduced bond purchases (tapering) will likely be set in motion at that meeting. Regardless, at some not altogether distant time, the tapering will begin.
I suggest that, whenever there is an easing announcement of whatever extent, there will be much wailing and moaning (and selling too) among the crowd who believes that the main thing having driven our markets the last couple years has been the QE (quantitative easing). This group of folks automatically derides the economic facts such as those above.
If you listen to these “QE has done it all” folks – investing pros, strategists, economist and financial media heads – there’s almost nothing positive over these past 4 plus market recovery years that isn’t directly due to the drinking of the QE Kool-Aid.
Wade Slome, writing in Investing Caffeine, offered a few examples of that thinking. To wit:
- QE created all the 7 million jobs during the recovery
- If it weren’t for QE, there would have been no turnaround in the housing or vehicle markets
- QE must be the direct cause for the S&P500 companies to be paying $300 billion in dividends this year
- The shale revolution boom couldn’t have happened without QE
In my opinion, those folks are mistaken about these and many other similar conclusions…he said understatedly. I see the QE as having been more like training wheels for our recovery. We needed them to get started, we can use them for a little longer but it’s definitely time they came off.
Any selling that occurs when a tapering announcement is made won’t be based on economic fundamentals. It’ll simply be traders taking profits. Don’t be bailing, just to bail. You won’t be happy if you do.
September
My friend, Sam Stovall, the chief market strategist at S&P, told me that – on a statistical basis – September has historically been the worst performing month in a market year. Don’t know why.
Regardless of how it ends, this September will be interesting as, unfortunately, Congress moves back into session and they do have a few things they have to deal with. There will be headlines and lots of heavy breathing about what their actions – and/or lack of same – “really” means. It could a great time for a trader. As an investor, I’d recommend not paying too much attention to their parade of pronouncements and resultant market movements.
In my view, and that of other professionals, it looks as if we are going to continue to build on our economic strengths moving into and beyond the fourth quarter. More jobs, higher incomes and continuously rising corporate profits should help move us forward.
With that to look forward to – and, more important – and football finally being back, things are looking pretty good from here.
Cheers!
Mike
509-747-3323
- CNBC, 29 August 2013
- Carpe Diem, 28 August 2013
- US Energy Information Administration, 3 Jun 2013
- Investing Caffeine, 24 August 2013
- To get an overview of economic conditions, use this link. It’s updated monthly
http://www.russell.com/Helping-Advisors/Markets/EconomicIndicatorsDashboard.aspx - Past performance is not indicative of future returns. Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.
Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.
Michael J. Maehl, CWM®
Senior Vice President
Opus 111 Group LLC
400 S. Jefferson, Suite 400
Spokane. WA 99204-3142
509-747-3323 office
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