We watch two important indicators when deciding whether to remain in the stock market or move our money elsewhere. These are interest rates and corporate earnings.
If interest rates move up too quickly the stock market becomes much less attractive as investors can move to other investments paying higher yields without the risk and exposure of stocks. As of publication date of this newsletter (Feb 19, 2015) we believe the Fed will continue to delay as long as possible any rate hike and although there is talk of a raise in June we believe the earliest we will see is very late in 2015 and possibly even 2016. The Fed has used a strategy of liquidity through Quantitative Easing and keeping rates low to turn around the economy. That is not a strategy we seem them ‘bailing on’ any time soon.
If corporate earnings show weakness we think about moving out. Price earnings multiples for stocks are historically on the high side right now. A bad quarter of corporate earnings could cause a major market sell-off and you don’t want to be the last guy to leave the ship.
We are also keeping our eye out for currency wars.
With nations facing fiscal constraints, the only tool available to central banks to stimulate growth is a weaker currency. With the slowdown in China, we have to closely monitor any moves China makes to depreciate its currency, which would have a negative impact on America’s trade deficit.
Such a move would also impact our northern neighbors. Our Canadian subscribers live in a commodity-rich nation. They will see prices of commodities pushed lower and possibly crash as China’s economy has slowed down and this is creating much less demand for the world’s commodities. China buys more than 40% of the world’s commodities and a weak China means doom for commodity prices.
The key question regarding the possibility of a global recession is: Will the US be able to pull the rest of the world out of its economic doldrums before the rest of the world pulls the US down?
With the economies of the world’s nations so tightly woven together, we will most likely all rise or all fall together.