As of Monday, February 4, with
58% of the S&P 500 companies reporting, fourth quarter
earnings are on track to drop 20.7% from a year earlier, according
to Thompson Finance. However, if you strip out financial stocks,
the remaining companies in the S&P 500 look to increase
earnings by approximately 11%. High technology companies will
likely show earnings growth for all of 2007 in excess of 25%.
Energy and medical related companies should also report double
digit returns for 2007. So why is the S&P 500 down 6%
year to date and down 12% from its October 2007 high? Fear
of a recession is only one answer. Others include uncertainty
over the November elections and the direction this country
will take in 2009 with regard to the Bush tax cuts as well
as spending for the war on terror and universal health care
(that would be 7% of the economy controlled by the government).
Many of the issues will be resolved by year-end.
The non-stimulus stimulus. Rebates have been tried in the
past to stimulate the economy. It didn’t work then,
and it will not work now. First of all, the rebates will not
be sent out for another four to six months. Secondly, the
money from rebates will most likely go into savings accounts
or be spent to pay down bills, not to purchase big screen
TV sets. Thirdly, the $150 million stimulus package will be
added on to the federal budget deficit which the government
now estimates will reach $410 billion in fiscal 2008 up from
$163 billion last year. Still, this increased deficit will
only amount to about 2.9% of our GDP ($14 trillion). This
is in line with the average of 2.6% since 1980. The deficit
will only become a problem if Congress continues to spend
more than it takes in.
The latest blow to the economy has just been reported by
the Institute for Supply Management (ISM). The ISM’s
non-manufacturing business index dived to 41.9 from 54.4 in
December. Anything below fifty signals contraction in this
segment of the economy. This report coupled with the January
jobs report showing a negative number for the first time in
over four years has many economists predicting a recession
and soon.
And now for the good news. It has often been stated as a
fact that consumer spending is 70% of the economy. In a recent
report from Adrian Van Eck at the Financial Research Center
(P.O. Box 6170, Holliston, MA 01746) this statement has been
challenged. He states that consumer spending comes to $4 trillion
annually or about 30% of GDP. He further states that the federal
government spending totals 20%, state and local spending 15%,
exports 12% and construction currently 10%. This adds up to
87%. The balance of 13% can be accounted for by the cost of
operating factories, private business rent expenses, college
tuitions and health and medical expenses. Consumer spending
will hurt retail stores and cause layoffs. However, our economy
is so huge and diverse that other areas will pick up the slack.
There are new projects developing to repair roads, and in
particular bridges, plus new appropriations on military spending.
Both of these areas will add new jobs, taking up the slack
elsewhere. Spending on national defense peaked in 1980 at
about 6% of GDP. The proposed $585 billion in defense spending
for fiscal 2009 will bring defense spending up to 4.2% of
GDP from last years 4%.
Recession or not? A recession according to Wall Street is
two straight quarters of declining GDP. A recession was declared
in 2001 although GDP declined for only one quarter. The National
Bureau of Economic Research defines a recession as a “significant
decline in economic activity spread across the economy, lasting
more than a few months, normally visible in real GDP, real
income, employment, industrial production and wholesale-retail
sales.” The problem with both of these definitions,
of course, is the lag time of anywhere from six to eighteen
months to make the declaration of a recession. There is an
old saying on Wall Street that says economists have predicted
seven of the last three recessions. The stock market is probably
the best indicator. It has been predicting trouble ahead for
several months now and will no doubt start a new bull market
before the economic indicators turn up.
Random thought for February 2008:
“Finance is the art of passing money from hand-to-hand
until it finally disappears.”
- Robert Sasnoff
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