|Dow||-61.49 to 16,987.51|
|S&P 500||-11.91 to 1,985.54|
|Nasdaq||-24.21 to 4,567.60
|10-YR Yield||+0.057 to 2.61%|
|Gold||-$8.60 to $1,229.30|
|Crude Oil||-$0.51 to $92.26|
(Columnist Mike Larson is out this afternoon. Mandeep Rai, editor of the Top Stocks Under $10 portfolio, is filling in. Mike’s afternoon column will return on Monday.)
Markets were taken by surprise with the recent growth in GDP that reflected a 4.2 percent increase for the 2nd quarter, coming after a 2.1 percent decrease in the first quarter.
Remember, that over time, stock market growth has to be reconciled with overall economic growth. It’s rare that the two decouple, or move separately. So what can we expect going forward? If growth in production stagnates, you can bet the stock market will follow suit.
The stock market has given us 35 straight months without a correction and is currently up 9.5 percent year to date after being up 32 percent last year. But can those kinds of gains continue?
First, you need people to produce goods and services to prop up those strong growth rates, but the labor force participation rate has been consistently declining.The long-term average growth in the stock market is around 7.5 percent, and the long-term average GDP growth is 3.3 percent. Is the current reading of 4.2 percent sustainable? I don’t think so, and here’s why …
The problem is that we have had record numbers of workers retiring at age 65, and the number who hit that age between 2010 and 2013 rose by 33 percent. What’s more, relatively lower birth rates in the 90s and 2000s mean less people are entering the labor force to offset the retirements.
Click for larger version.
Source: US Census Bureau
That’s the demographic issue.
Second, is the productivity issue …
If companies keep holding on to record levels of cash, or coming up with intriguing ways to engineer higher earnings i.e. with buybacks and buying lower P/E companies, they are surely not spending money on new technologies to increase productivity or in research and development to support future sales growth.
Third, the largest component of GDP is the consumer, and he/she hasn’t seen any real wage growth. Nominal wage growth is around 2 percent, but so is inflation as shown in the chart below.
Click for larger version.
However for the time being, consumers are enjoying lower gas prices. But overall trends for higher energy prices remain intact, so enjoy the lower prices while you can. The point is that lower gas prices, not wage growth, is helping consumers keep more money in their pockets.
Hopefully that will change, but some of these trends can take years to reverse. And, to that effect, it’s just a matter of time before equity markets will realize they are facing an uphill battle if economic growth decelerates.
|OTHER DEVELOPMENTS OF THE DAY|
The Apple Watch will include NFC payment using the Apple Pay system, meaning that customers can link their credit cards to their watch to pay for items by holding their watch near a special sensor.
What’s more, it also has a clever way of defeating thieves from gaining access to those credit cards.
India is expecting investments worth nearly $100 billion in the renewable energy sector in the next four to five years, Piyush Goyal, minister for power, coal and renewable energy in the Narendra Modi-led government, said Thursday, according to media reports.
Olive Garden is hurting itself by piling on too many breadsticks, according to an investor that’s disputing how the restaurant chain is run. In a wide-ranging critique, the hedge fund Starboard Value says Olive Garden restaurants lack training and discipline and that servers bring too many breadsticks to tables at a time. That leads to waste — and cold breadsticks, Starboard says.
What’s your opinion? Do you think our economy will continue to grow, or is it doomed to stagnate? Let us know in comment section below.
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