The holiday-shortened week has been relatively boring, with the markets flat to slightly down through the end of Thursday, Sep. 9th. Trading volume was down, and the market has been sending mixed signals. Telecommunication, Healthcare and Consumer Staples were the leading sectors this week, which could be a defensive move; however, Industrials have been up week-, quarter- and year-to-date.
In economic news, the weekly initial jobless claims dropped more than expected, decreasing by 27,000, though this could be because of the Labor Day holiday. Continuing jobless claims only fell by 2,000. The U.S. Weekly Retail Chain Store Sales were down for the week, but overall sales are still growing, up nearly 2% from last year. The Fed’s Beige Book, a lagging indicator that summarizes current economic conditions by district and sector, told us what we already knew: The economic expansion appears to be continuing, albeit at a decelerating pace. The rough patch we are experiencing began mid July with the housing sector struggling after the federal tax credit expired.
Good news came by way of the U.S. trade deficit shrinking for July, posting its biggest drop in 17 months as exports of airplanes surged and U.S. demand for imports fell. Overall, exports grew 1.8% to $153.3 billion, while imports declined 2.1% to $196.1 billion. Most significantly, our trade deficit with China declined to $25.92 billion from $26.15 billion in June. Interest rates also ticked up this week with the five-year U.S. Treasury up the most by 0.116%.
All these healthy signs give us reassurance that our economy will not slip into a double-dip recession. We are likely just experiencing a slowdown. We suspect we will continue to see growth in the economy and employment. We might see a little inflation, but we do not feel this will be a problem in the near term. Wheat, corn and meat prices have been up, increasing the cost of food. Rents have been up as well, meaning the cost of living is increasing for the ordinary consumer. However, we have also noted that disposable income has increased almost every month over the past year.
In market news, we are coming up on earnings preannouncement season where companies release their expectations for third quarter. We expect to see some good numbers. Overall, news from corporations has been good. Not only have we seen mergers and acquisitions activity, but companies are borrowing money, taking advantage of low interest rates.
Companies that have cash are borrowing money because they can. It might not make sense, as there has been so much talk about deleveraging, or paying down any existing debt on balance sheets. Many companies did just that, and now they have more cash. But their stock prices remain low. If you consider the optimal capital structure model for a corporation, it makes more sense to borrow money at low interest rates. A corporation will then use that leverage to increase financial resources for growth and expansion. The assumption is that management can earn more on borrowed funds than it pays in interest expense and fees, especially given that the government allows interest expenses to be written off on taxes. Later as the company’s stock price increases, they can opt to issue more shares.
We think come November third or fourth, after the election, we are going to see a bull market like we have not seen in years. There is plenty of potential in the marketplace. Right now there is still a lot of money on the sidelines. Many research and brokerage firms are still sitting on the fence because buy recommendations are at a low we have not seen since 1997.
The thing to keep in mind is that the markets have all been up over the past year. The economy is moving along, albeit not swimmingly, and the world is not going to end. Deficits will be cleared up for the big financial corporations, as they will not have any other choice. So far, everything that has come as a result of the financial regulation overhaul has fallen into place without much negative impact in the market. However, firms like JPMorgan Chase & Co. (NYSE: JPM) and Goldman Sachs Group, Inc. (NYSE: GS) are getting out of the proprietary trading business. Regulations will likely hurt the big banks, so those stocks are best avoided.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
