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Portfolio strategy update Electionomics David Gottstein Petroleum News Contributing Columnist
Electionomics. That is how we are referring to the Bush administration’s domestic economic plan.
The combination of tax cuts, and a greatly expanding federal deficit, has contributed largely to a robustly expanding U.S> economy.
Even third quarter GDP numbers were revised upwards to 8.2 percent — an incredible growth rage in anybody’s book. Even though it can’t be sustained, it bodes well for the future. U.S. in solid recovery Housing continues to be very strong. Consumer confidence is rising, and unemployment claims have finally started to fall. We are in a solid recovery. Corporate earnings are up solidly, and capital spending is just starting to see some life, another important component to a sustained recovery.
That’s the good news. In fact it is excellent news.
The stock market has anticipated the recovery, and has priced into it already a lot of good news, trading at about a 20 price earnings multiple.
However money continues to flow into stock mutual funds, which bodes well for the stock market in the near future as well. What drives the stock market in the short term generally is sentiment and liquidity. The rise in the stock market so far this year has given investors more confidence about the future, and therefore has led them to increase their own asset allocations away from bonds and towards stocks. Therefore the prejudice is positive until some unexpected negative events occur. Three negatives on horizon The three biggest potential negatives out there relate to growing trade tensions with China regarding our foreign trade deficit, an election issue for sure, rising interest down the road as the hangover from binge spending, and setbacks in the war on terror, either at home or abroad.
Even though good times seem to be renewed, it would be reckless to assume away these dangers, and not act at least somewhat defensively.
A trade war with China would put a big damper on both our economies, and cast a big pall on future growth prospects. It is very likely within the next 18-24 months we will see the beginning of a sustain bear market in bonds and a compression in PE ratios, and of course lack of progress in Iraq, or a successful terrorist attack at home could cause another serious economic meltdown. Not something we are predicting, but a risk to be cautious of.
Editor’s note: David Gottstein is with Dynamic Research Group in Anchorage.
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