How does a weaker economy translate into higher stock prices? Is that a good thing, or is it a short-term high with long-term consequences? What should you do? Buy? Sell? Hold?
Below we’ll discuss:
1. Signs of a Weakening Economy
2. The 2Q 2019 GDP Report
3. The Shocking 36% Drop in Foreign Investment in U.S. Real Estate
4. The U.S. Budget Deficit and Skyrocketing Public Debt
5. The Federal Reserve Board Meeting on July 30-31, 2019
6. Financial Stability and Asset Bubbles
7. What You Should Do.
And here is additional information on each subject.
1. Signs of a Weakening Economy
The 2Q 2019 Corporate Earnings Decline (happening now).
The benefits of last year’s tax cut are last year’s news, and now corporations must return to selling more product (or buying back their own stock) to increase their earnings per share. So, which companies are hot, and which are using financial engineering?
Wall Street continues to be a tale of two cities. The newer growth companies, like FANG, are reporting strong (real) sales growth, but are overpriced. As you can see in the Stock Report Card below, valuations are lofty. You can also see that stocks that miss the growth boat are punished pretty heavily. Micron is down 26% from its 2018 high. Nvidia is down 40%. Apple repurchased $28 billion in buybacks to keep its stock price up. And this is at a time when the general market is back near its all-time high.
Last century’s name brands don’t appear to be as over-priced as the hot 21st century disrupters because buybacks are at an all-time high. Corporate buybacks take earnings per share higher (by reducing the share count), which then takes the price to earnings ratio lower. Apple tops with the list of corporate buybacks in the 1st quarter of 2019 with $23.8 billion shares repurchased, with Microsoft in the top 10 as well, with $4.8 billion in buybacks. Boeing is another top repurchaser of its own stock, along with Pfizer, Cisco, JP Morgan, Wells Fargo, UnitedHealth and Walgreen’s (and others).
Meanwhile, the Retail Apocalypse continues, with J.C. Penney seeking help from restructuring experts (i.e. bankruptcy). The company’s stock (symbol: JCP) dropped under a dollar today, making Penney’s a penny stock.More Earnings
Boeing announces 2Q 2019 earnings on July 24, 2019 at 10:30 ET, about an hour after the markets open. On July 18, 2019, after the markets closed, Boeing announced a $4.9 billion charge ($8.74 per share) + increased costs of $1.7 billion. In other words, the 2Q 2019 earnings report should be ugly. This is something that investors should have seen coming. Learn more in my Boeing blog from 4.8.19. (Click to access.)
So, why did Boeing stock go up on July 19th, after the warning? The company is likely using buybacks to keep the stock afloat. Boeing repurchased $2.6 billion of its own stock in the 1st quarter of 2019.
Netflix saw sales growth of 26% this quarter and is projecting year over year revenue growth of 31.3% in the next week. That’s pretty amazing. However, the subscriber count came in lower than projections, so the stock went down. With Netflix it is largely a case of being overpriced. The company is outstanding. But the price to earnings ratio is 131.
Tesla’s 2Q 2019 earnings report on July 24, 2019 after the markets close should be stellar. In the 2nd quarter Tesla delivered 95,200 vehicles, compared to just 63,000 in Q1. That is an increase of 51%. This could make for a record earnings quarter. Tesla’s share price has already rallied 43% from its June 3rd 2019 low (when I published a blog predicting this stellar quarter). The only thing standing in the way of additional gains is the 2nd Quarter 2019 GDP report, which will be released on July 26, 2019 at 8:30 am ET.
2. The 2Q 2019 GDP Report (advance) will be released at 8:30 am ET on July 26, 2019. Just how weak will it be?
Estimates are at 1.5-2.1%. Significantly lower than the 1st quarter. Full year 2019 GDP is predicted to slow to just 2.1%, compared to 2.9% in 2018. By comparison, China’s GDP this year should be 6.2%.
3. Foreign Purchases of U.S. Existing Homes Sank by an astonishing 36% over the last 12 months. What happened? It’s largely a story of unaffordability – something I wrote about in a blog earlier this month. In the U.S., 74% of people cannot afford to buy a home in their city.
According to Lawrence Yun, the National Association of Realtors chief economist, “A confluence of many factors – slower economic growth abroad, tighter capital controls in China, a stronger U.S. dollar and a low inventory of homes for sale – contributed to the pullback of foreign buyers. However, the magnitude of the decline is quite striking, implying less confidence in owning a property in the U.S.” (That’s his way of saying that home prices are too high, and the international community isn’t taking the bait anymore.)
What does this mean for U.S. buyers and sellers? Certainly, it’s important to remember that one of the most important considerations for successful real estate investing and home ownership is the price itself. If you’re thinking of buying, the price is too high, and unaffordable, in most U.S. markets. If you’re thinking of selling, your buying pool just got significantly smaller. If your home isn’t snatched up right away, your price may be too lofty.
4. U.S. Budget and $22 Trillion Public Debt. The U.S. is currently using extraordinary means to pay bills. Congress needs to raise the Debt Ceiling before we run out of money now. There is talk that the House will vote on a deal on July 26, 2019, so that the Senate can pass it before the August break. According to Paul Ashworth of Capital Economics, a research group, “The Federal government ran a deficit of $215bn in August last year which, if repeated this year, would leave it with zero cash going into September.” Chairman of the Federal Reserve Board Jerome Powell believes, as do most economists, analysts and rating agencies, that the Debt Ceiling will be raised before we run out of money. In Powell’s testimony before the House of Representatives on July 10, 2019, Powell said, “I assume that the Debt Ceiling will be raised in a timely fashion. Any other outcome is unthinkable. I wouldn’t be able to capture the range of negative outcomes.”
At the same hearing, Jerome Powell also expressed grave concern about the budget deficit and ballooning public debt, of $22 trillion and counting. (This will increase again once the Debt Ceiling is raised.) Powell said, “The U.S. budget is on an unsustainable path. We’ll wind up spending more on interest than on educating our grandchildren. Our generation should be paying for it rather than passing the bills onto the next generation.”
5. Will the Feds Cut Rates on July 31, 2019? There are a slight majority of Federal Reserve Board Governors who are concerned about financial stability and asset bubbles, who have been reticent to cut rates too soon. (See my analytical blog for details on which board governors lean this way.) However, the rate cut might happen for many reasons. The housing report was astonishing low. The GDP growth is predicted to be much weaker than 1Q. Earnings are slowing. And Wall Street is expecting a rate cut. The Feds don’t want another sell-off like December of 2018 (the worst December since the Great Depression). A 10% rise in stocks = 1% rise in GDP, according to Alan Greenspan. So, that might be what the Feds (and certainly the White House) want.
The Real Question is whether a rate cut will send the market higher or not. It could this summer because volume is low and novices are playing. However, once the professionals return in September, it could be a different story. Wall Street pros know that the cut was due to worries about the economy. They know that there is a slowdown in sales, too much leverage and that the prices are too high. Leverage might even be too high to support continued borrowing to repurchase shares. Just as happened with GE, when a firm is over-leveraged and needs more dough, the banks will add conditions that prevent them from repurchasing stock or paying dividends. So, fall isn’t looking good for stocks this year.
6. Financial Stability and Asset Bubbles. Low interest rates create bubbles. Today’s bubbles are more troubling than they were before the Great Recession or the Dot Com Recession. See the Asset Bubble chart directly below.
7. What Should You Do? Buy? Sell? Hold?
- Rebalance your nest egg now
- Know what you own, and be confident that you are properly diversified
- Know what’s safe in a world where both stocks and bonds lost money in 2018 and are vulnerable going forward
- Add some heat. There are hot industries that go up if the markets go down, and there are companies that are more fiscally healthy than others. Avoid leverage.
- Never reach for yield.
This may sound complicated, but it is easy-as-a-pie-chart, once you learn the ABCs of Money that we all should have received in high school. Getting safe now should be your number one priority. Don’t rely on your financial advisor to do this for you, in a world where almost everything that a financial services company can sell you is highly leveraged and overpriced.
Listen back to my free July teleconference on BlogTalkRadio.com/NataliePace, where you can get additional information on each topic. You can also hear my answer to a caller’s question, “Is gold a good place to get safe now?” Our team opens up the line for questions in the second part of the call (usually about 20-25 minutes into the call).
Now is the time to fix the roof while the sun is shining (while the markets are at an all-time high).
If you’d like to learn time-proven strategies that earned gains in the last two recessions and have outperformed the bull markets in between, join me at my Wild West Investor Educational Retreat this Oct. 19-21, 2019. Click on the flyer link below for additional information, including the 15+ things you’ll learn and VIP testimonials. Call 310-430-2397 to learn more. Register by July 31, 2019 to receive the best price.