Will Economic Headwinds Stall the Equity Uptrend?
NEW YORK (TheStreet) -- Investment caution flags have been raised by the economic headwinds, both in the U.S. and the world, but history may imply a different outcome.
Headwind 1
A slowdown in worldwide growth -- since the bounce off of the 2009 recession, worldwide economic growth has been slowing, from near 5% in 2010 to about 2% in 2013. This includes growth in every market (developed, emerging and the BRICS);
Headwind 2
Rising U.S. interest rates -- some say that rising rates are sure to impact consumer spending, and the pundits tell us that rising interest rates will surely have an impact on home prices and sales. There already is evidence that demand for mortgages has slowed;
Headwind 3
The job market is not as healthy as the headline -- while June created 195,000 jobs, 240,000 full time jobs were lost (implying that 435,000 part-time jobs were created). In addition, short-term discouraged workers rose by 247,000 to 1,027,000. The holders of 75% of the newly created part-time jobs wished they had full-time ones. So, while the official U.3 unemployment rate remained at 7.6%, the U.6 rate (which takes into account part-time job holder desires for full-time work) rose a whopping .5% from 13.8% to 14.3%;
Headwind 4
Sequestration -- while this has not had a big impact to date, the likely failure of a political agreement for the upcoming fiscal year could cause significant issues. Already, Defense Secretary Hagel has put the budget cut number for the Pentagon at $52 billion;
Headwind 5
Political Instability -- tensions in the Middle East (a coup in Egypt, civil war in Syria, unrest in Turkey), to say nothing of the threat from Iran's nuclear program, can potentially wreak havoc on the markets. There are also social tensions in Brazil where inflation, running at 6.7%, has caused the central bank to raise the base bank lending rate to 8.5%.
Despite these headwinds and the relatively small equity market correction during the "taper tantrum," by mid-July, U.S. equity markets again set new highs in the wake of Bernanke's reassurances that monetary accommodation was still entrenched. Many believe that the headwinds, in conjunction with a market that has not really paused in its uptrend for nearly a year, could result in a renewed bear market, or, at least, in a significant correction, despite the continuance of easy money.
But according to David Rosenberg (Gluskin-Sheff), known fairly or unfairly as a perma-bear, in the history of the last 50 years, the initial rise in interest rates always occurred when the economy began growing, and the initial rise in yields never caused the economy to backslide. History also indicates that during such periods, the U.S. equity markets rise.
While we should be concerned about China's economy, Rosenberg indicates that U.S. exports to them amount to a very small part of GDP. The same is true of U.S. exports to other emerging nations, and it doesn't appear that Europe's recession is contagious. The U.S. economy, he says, is driven mainly by domestic economic events, and rising domestic economic activity implies higher interest rates and rising equity prices are not inconsistent with this scenario. When perma-bears turn optimistic, it may be time to take note.
So, there we have it. Clearly headwinds are emerging. Will they have a negative impact on equity markets? Or are we just at the beginning of a period of domestic economic growth with the accompanying increase in equity values? The right answer is crucial to the financial well being of your portfolio.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Robert Barone is a partner, economist and portfolio manager at
, an investment advisory firm in Reno, NV.
He previously held positions as an economist for Cleveland Trust Company and as professor of finance at the University of Nevada. During his tenure at Comstock Bancorp in 1996 he became a Director of the Federal Home Loan Bank of San Francisco, serving as its Chair in 2004.
Barone also served as Director of AAA of Northern California, Nevada and Utah and a Director of its associated insurance company. He currently serves on AAA's Finance and Investment Committee. Along with his son Joshua, he founded Adagio Trust Company in 2000. Barone received a Ph.D. in Economics from Georgetown University.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.