Earnings Season Over, Prepare for Doldrums
Another earnings season is under our belts and the consensus is…the economy is still stagnant. Other than the financial sector, consumption spending and investment from businesses remains weak. When businesses aren’t willing to invest, well, you probably shouldn’t either.
Most of my concern stems from today’s price action and yesterday’s switcharoo coming out of the Federal Reserve. Clearly, Ben Bernanke and the rest of the board foresee significant deflation risk in the short term, that is enough to want to avoid the stock market like the plague.
But what makes matters even worse, is that we have two events in the next four months that will absolutely make or break any short term rebound. First is the back to school shopping season, and second is the holiday shopping season.
The Consumer Must Return
Without growth in consumption, the near term prospects for the economy remain terribly weak. Consumption is, after all, a whopping 70% of the GDP and one of the weakest performing categories when the economy is on the brink.
But consumption is also important from a macro view. Consumption spending spawned by easy credit allows for the M0 money supply to leak into M2, and that is exactly what the Federal Reserve is begging for. Should consumers begin spending with borrowed, not saved, funds, the economy will experience a period of short term growth. And should that spending reach threshold, the resulting recovery would be enough for at least an inflation fueled boom. Of course, the downside is that the bubble will pop again, and the Fed will have an even bigger problem on its hands.
If in doubt, wait it out
If you have open positions leave them. If you have shorts, leave them. If you’re long, leave it. We’ll probably pick up on January 1 at the same price we’re at today. By January 1st we should have a MUCH better idea on the future of the economy.
