3 Stories in the global economy that should not go un-noticed
Markets closed mixed last week as stocks experienced a period of lackluster trading. While the Dow and Nasdaq indexes eked out gains, the S&P 500 notched its first loss in five weeks, driven lower by some earnings misses. With investment markets at near historic highs, it’s not surprising to endure a slow week halfway through earnings season. Thus far, more than 50% of S&P 500 companies have reported in, with 68% beating earnings expectations, above the historical rate of 63%, and 56% topping revenue estimates.
For the week, the S&P 500 lost 0.03%, the Dow gained 0.1%, and the Nasdaq gained 0.71%.
Here are the 3 stories this week that rose above the noise:
Inflation Is Rotten to the Core
Today core inflation, which excludes food and energy, is one of the main measures of inflation used by investors, economists and analysts. In this editorial, Irwin Kellner argues that core inflation is a flawed measure. Food and energy prices are two of the most important components of most peoples’ budgets.
In the ‘70s, the Fed started using core inflation because it felt it had no control over the supply of food and energy, which it argued were more influenced by factors like the weather and geopolitics rather than the economy. In reality, food and energy are susceptible to economic conditions, and while indicators like core inflation may not show much of an increase, more broad measures of inflation are likely different.
China Is Going to Slow down but it Can Handle It
Writing in the Financial Times, Michael Pettis outlines his opinion that GDP growth in China is highly likely to drop to 3 percent to 4 percent in the coming years. However, in contrast to many analysts, Pettis argues that this need not lead to widespread social unrest within the country. Rather he makes the case that as long as household incomes continue to rise at the pace of recent years the economy can continue its widely anticipated shift away from investment and toward consumption.
However, in order to do so without dangerous increases in already elevated debt levels implies investment growth rates of near zero and overall GDP growth of 3 percent to 4 percent. The author makes a convincing case that this can be accomplished without widespread social unrest or an economic crisis.
Companies Sitting on Cash Pile of over $1 Trillion
Over the last 20 quarters, U.S. corporations have hit a new record for cash reserves 18 times. That trend appears to have continued through the second quarter and S&P 500 firms now have almost $1.1 trillion in cash reserves. Companies have chosen to keep their cash on the sidelines until they feel more confident about future economic growth.
Cash reserves have not been used as much for capital expenditures, hiring, and expansion, but firms have been increasing dividend payouts and share buybacks with their excess cash, both of which are a positive for shareholders. Currently, the technology sector has the highest cash balance of any sector, which bodes well for future share buyback and dividend increases for technology firms.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
