Over the past two weeks, several leading economic indicators were released, all of which (including housing starts, consumer confidence, and durable goods orders) point to trouble ahead for the U.S. equities market.
Meanwhile, Standard & Poor’s revealed in a teleconference on Monday of this week that its analysts are estimating corporate profit growth to slow considerably during both the second and third quarters of this year.
Other recent economic and financial data, some of which is rarely (if ever) mentioned in the mainstream media also give cause for concern for those invested in U.S. equities.
For example, last month’s same-store sales figures for the nation’s major retail chains were the worst since July 2004 — when the Fed began its stretch of interest rate hikes — airline traffic slowed significantly during May and net foreign purchases of long-term Treasury securities fell substantially in April (the latest month for which data is currently available).
While the indicators mentioned above strongly suggest the economy will continue to slow over the coming months and that stock prices will fall later this year, inflationary pressures continue to persist.
For example, crude oil prices have risen 24 percent since January of this year, while raw food costs (eg. soybeans, corn, wheat) have also been trending significantly higher.
Meanwhile, productivity growth has slowed considerably at the same time that unit labor costs have risen, which suggests companies will either need to raise the prices of their products/services to maintain profit margins, or they will need to find ways to cut costs (i.e. cut their workforce).
Yesterday morning, the U.S. Department of Commerce released their latest estimates for real GDP, which showed the economy grew at the slowest pace in four years — at 1.9 percent on a year-over-year basis and a mere 0.7 percent on an annualized quarterly rate.
On Thursday afternoon, the Fed announced that it had decided to leave short-term interest rates unchanged at 5.25 percent, as "economic growth appears to have been moderate during the first half of this year.” The Fed went on to say, "a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.”
We think the economic statistics mentioned above, and numerous other economic measures of economic growth and inflation, indicate the economy could enter a period of stagflation later this year.
Yet, as John Browne revealed yesterday in his latest Financial Intelligence, the Fed is currently stuck between a rock and a hard place — if the Fed lowers interest rates to stimulate the economy, it risks fueling the inflation flame.
On the other hand, if the Fed raises rates, it risks throwing the U.S. economy into an immediate recession. However, we think the bull market in equities may have one more surge before it finally runs out of steam. In our Financial Intelligence Report, we discuss ways for investors to profit from such a surge.
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