A recession could be coming soon. At least that’s what everyone is talking about these days.
You’ve probably heard a lot of speculation recently about the state of the economy (even if you don’t follow the stock market everyday). January 2016 had the worst two week start on record. Many bears are predicting that economic growth and profits will be weak in 2016. Will that end up being true? The fact is many top economists have a hard time predicting turning points in economic/profit growth. At an uncertain time in the market like we are in right now, there is going to be a lot of speculation from both sides. From the bears (the ones saying the market and the economy will keep slowing down), they cite the following evidence:
Economic Indicators pointing towards a Recession:
The collapse of the Shanghai Shenzhen CSI 300 index drove stock prices down nearly 40% in China and caused a decline of 12% in the United States, as well as short-term volatility. The Chinese government then issued to have central banking money essentially pumped into the market.
The Baltic Dry Index dropped 12 points to a record low of 325. The Baltic Dry Index measures cargo shipping rates, and the index assesses the price of moving raw materials in bulk. This basically indicates the lack of demand in commodities (raw materials).
Oil prices: The price per gallon has dropped dramatically, hovering around the $30 range. The reason for this “dramatic” drop is due to the the over-supply problem and the decrease in demand. China is mainly contributing to the lack in “demand” because they are switching from an industrial-based economy to a server-based economy.
Oil supply is the main contributor to the collapse in the price per barrel. OPEC has been trying to put restrictions on production on multiple countries such as Saudi Arabia and other middle-eastern countries.
US Dollar strength: The U.S. Dollar index has risen 24%, which has caused financial havoc for companies who have large amount of sales in foreign countries. The dilemma for primarily large cap companies is the currency conversion back to USD to be able to report legitimate earnings.
When other global economies weaken, world investors pile into the U.S markets in search for high returns.
Import prices: The strong Dollar is causing a major decline in import prices. This creates a problem for companies who compete with imports.
Morgan Stanley Business Conditions Index fell to its lowest level since February 2009. Morgan Stanley’s Chief U.S Economist headlined a report which stated “losing faith.”
Auto Sales: There has been a consistent upward trend that has been climbing for multiple years; but this trend has started to slip from the peak. Manufacturers are more sensitive to potential trouble abroad because of their reliance on exports.
U.S counties who haven’t fully recovered from 07-09 recession are at a whopping 93%. This is measured by comparing current economic levels to current to pre-recession levels.
Corporate Earnings: Many analysts estimated that profits from S&P 500 companies in the last quarter of 2015 had their biggest drop from the year before; the last time this estimate was made was in 2009—(Data collected from Bloomberg).
The reason for this estimated 5% depreciation, and the actuality of many sectors getting hit hard with declines from earnings season is because of two primary factors:
– Factor 1: Oil prices capsizing –creating volatility problems and increased job loss in the oil/energy sectors.
– Factor 2: The U.S dollar strength is also contributing to corporate earnings because international sales are being cut dramatically (especially with the de-valuation of the Yuan). Domestic companies are trying to keep their head above water when it comes to international sales.
The current breadth indicators have created a lot of tension and volatility in domestic markets. This is scaring investor capital out of the markets, and causing problems from a global standpoint.