However, as an investor, I’ve learned that to make money, it’s crucial to understand both sides of an argument when forecasting the future. That’s because for every transaction there is a buyer and a seller, and both believe they’re getting the better deal.
While I am confident in saying the U.S. stock market is due for a decline — possibly a big one — before the end of 2014, I’m an optimist at heart and believe that better things eventually lie ahead for the U.S.
That’s why successful investing is about getting the sequencing, or the order of events, correct so you can profit and protect your capital during all different kinds of market conditions.
|Despite perceptions of an erosion of U.S. economic vigor, America still seems way ahead of whichever country is in second place.|
The way I see it today, the U.S. stock market needs to pull back before it can go forward. But that correction will mark the beginning of another long-term bull market that will prove to be a golden age for equity investors. After you read the rest of this article, head to our Money and Markets’ Facebook page and let me know what you think.
You might be wondering about the catalysts for a long-term run-up in stock prices, given that the U.S. is hobbled by massive debt, broken politics and central-bank interference.
I recently came across an article written by economist and financial commentator Gary Shilling that provides six reasons to be bullish on America’s economic prospects. I agree with all of them.
Demographics. Shilling makes the point that demographics are the first and most important factor favoring America.
The immigration debate in Washington is no longer about throwing illegal immigrants out of the country but over how to give them legal status and a path to citizenship while attracting highly educated and skilled newcomers. Only a few other countries, such as Canada and Australia, are at least as open as America is.
Immigrants tend to be younger and have higher birth rates than current residents. In the U.S., the fertility rate of 2.06 is close to the 2.1 births per child-bearing woman needed to sustain the population in the long run.
Because of aging populations in all major economies, immigrants are needed to keep the 15-64 working-age population from falling faster as a percentage of the total. By 2040, the U.S. ratio, 60.3 percent, is projected to be the highest of any developed country. By contrast, China’s ratio falls rapidly from 72.4 percent in 2010 to 63.1 percent in 2040 due to its one-child policy.
Energy Independence. America is on the way to self-sufficiency in energy. Horizontal drilling and fracking technology have unlocked natural gas and petroleum from shale oceans. The U.S. could be largely free from foreign oil dependence by 2020, helped by oil sands and other nonconventional sources of energy as well as higher auto fuel-efficiency and conservation. Cheap natural gas is also a competitive advantage for other U.S. producers, especially in the petrochemical and nitrogen-fertilizer industries.
Increases in domestic oil and gas production will create a global energy supply cushion that will allow the U.S. to deal with issues in the Middle East and other trouble spots without the debilitating spikes in oil prices experienced in the past.
Labor Flexibility. An added long-term advantage for the U.S. over the international competition is our flexible labor markets. Labor unions are becoming a thing of the past, especially in the private sector and now increasingly among state and local employees (Chart below). Partly as a result of the weak economy, U.S. wages are slipping. Of people out of work for six months who find new jobs, a third work for less money than they previously did.
Working for less is almost unheard of in Europe, and lifetime employment is the rule in Japan. China is increasing minimum wages about 25 percent per year to provide more consumer-spending power in an attempt to shift from an export-led to a domestically driven economy. But higher wages erode the global competitiveness of China, as production is shifting to cheaper locales such as Vietnam, Bangladesh and Pakistan.
As an example, consider the car industry in the U.S. Shilling says that, after the Great Recession drove GM and Chrysler into bankruptcy restructuring, automakers hired new workers at $14 an hour, half that of veterans. So in 2011, the average pay of U.S. autoworkers, including benefits, was $38 an hour compared with $66 in Germany and $37 in Japan. U.S. pay has increased $3 an hour since 2007, but $12 in Japan and $14 in Germany. As a result, vehicles from U.S. auto plants are beginning to be shipped abroad in numbers.
Declining Need for Foreign Financing. Another major advantage for the U.S. in future years is the likely decline in dependence on foreign financing. The current account deficit measures the extent that U.S. investment exceeds the combined saving of consumers, businesses and government.
With consumer savings being low and federal deficits being large, the current account deficit has been sizable — about $400 billion at annual rates. That deficit is financed by increases in foreigners’ holdings of stocks, Treasuries, real estate, among other securities, as they recycle dollars back to dollar-denominated investments.
I don’t believe that the Chinese or other countries will dump their huge holdings of Treasuries and other dollar-denominated securities. That’s because if they started selling, the value of their remaining Treasuries would collapse and a global recession would no doubt follow.
A rising consumer savings rate in the U.S. will slow growth in spending, including on imports, which could be the catalyst for the market sell-off that I am expecting.
That will curtail the exports of export-led economies like China. The shrinking of the U.S. trade and current account deficits, as a result, will put fewer dollars in foreign hands that need to be recycled into U.S. investments.
Strong Dollar. A rising dollar is another long-run advantage for the U.S., reflecting the economic, political and financial strength of America as well as the greenback’s continuing status as the world’s primary reserve and trading currency.
The dollar will likely remain the world’s preferred currency because of a large economy growing in GDP per capita, promoted by robust productivity growth; deep and broad financial markets; free and open financial markets; and confidence in the value of the currency.
Entrepreneurial Spirit. Something less definable, but equally important, is America’s entrepreneurial spirit. Despite perceptions of an erosion of U.S. economic vigor, America still seems way ahead of whichever country is in second place in various metrics, such as employment, pay and education.
So there you have it — six reasons why I have confidence in the U.S. economy and stock market.
However, remember that in investing, it’s getting the sequence right that matters. And in this instance, it’s short-term pain that sets the stage for long-term gain.