At first glance, the past 5 years or so has been a glorious time for US stock market investors – a boom time! The S&P 500 is up almost 80% since the low in March 2003, an annualized gain of almost 12% per year. This is very close to the average long-term forecast espoused by many financial analysts, and a full 4% points above the historical performance of the stock market.
If the only chart we paid attention to was that of the S&P 500, we might be lured into believing that this has been a boon period. But the next chart reveals "something is rotten" (as Marcellus in Shakespeare’s Hamlet is famous for saying!).
The US Dollar Index has suffered a massive decline from close to the 100 level to its most recent close around 72. Indeed, if the gains of the S&P were translated into euro terms, the result would be a 5 year gain of LESS THAN 20%, an annualized gain of less than 4%, which is HALF the historical growth rate!
If this is where the "rotten-ness" ended, we might be comforted. But digging still deeper, we can see clearly the results of the decision by the Federal Reserve to cut interest rates and to stand by the statement that the "government is prepared to do whatever it takes to maintain financial stability in our market system".
The result is soaring commodity prices and surging import prices. As these commodity prices soar and living expenses mushroom, confidence among consumers diminishes as we have already seen with simply horrible numbers reported recently!
As consumer confidence declines, spending on discretionary items tends to decrease. And with the consumer typically credited with comprising approximately two thirds of the economy, a consumer in trouble is an economy in trouble.
Perhaps, consumers could ride out the tough times if they had a glut of savings on which to fall back. But the chart below shows the Savings Rate is, well, not much of a Savings Rate at all!
Perhaps the absence of savings was not a problem while home values were appreciating; after all a line of credit could be tapped. But no longer is that the case in most parts of the country.
Moreover, consumers face an additional problem, that of wages failing to keep pace with inflation. If you’re wondering if your wages are keeping pace with inflation, this calculator offers an easy way to find out.
With the gloomy long-term outlook, it is imperative that some international exposure is maintained. Indeed, it’s one the primary reasons why approximately 30% of all our trades issued this year have been on overseas plays.
While the economy long-term may be in trouble, short-term prices can always ‘inflate’. Inflate because it would be an illusion to think they are rising substantially when the rises are offset by the dollar decline. For our shorter-term analysis, we will refer to our daily blog and Market Commentary sections in weekly Trade Alerts. For the long-term, we encourage you to consider some exposure to foreign plays at this time.
