A stagnant economy doesn’t mean the US is recession bound, but high debt means gold and commodity futures are likely to trend higher in the fourth quarter.
No one is going to say the US economy is humming along, yet the good news for US companies is that emerging markets are helping keep many of them profitable. And while real estate and jobs data remain a fundamental drag on investor sentiment, other indicators show the US economy is at least on track to grow at the anemic forecasted 2.5% this year.
“We believe there will not be a double dip recession in the United States because almost every indicator, except housing, is showing the economy is still growing—just very slowly,” says Paul Dietrich, chairman at co-chief investment officer at Foxhall Capital.
The US stock market is now more indicative of global revenues and earnings and not just from the US. About 50% of the revenues and profits of all the S&P 500 companies come from Asia and other emerging markets, all growing over 5% year-to-date. Most major companies are still beating earnings and profit estimates and that is the best sign of all for a long-term rising stock market, Dietrich said in press release Monday.
Dietrich’s crystal ball might be right about a double dip, but that doesn’t remove the systematic risks the market’s been hit with over the last two months.
Uncertainty over the US economy and the outcome over raising the $14.26 trillion debt ceiling remain high. “There are a lot of clouds in the market currently (including) European sovereign debt, the US debt ceiling and deficit reduction discussion, banking regulations, and emerging market (monetary) tightening,” says Dimitre Genov, fund manager of the Artio Global Equity fund (JGIEX). The deficit debate has been driven by politics, with Republicans looking to cut Democrat-favorite programs, like funding to Medicare and even National Public Radio, and Democrats threatening default if the Republicans do not raise the debt ceiling, currently at $14.26 trillion. That ceiling was broken through in April.
From a market perspective, “It is very difficult to handicap how all this will play out and the respective impact on the markets. Fundamentally and technically speaking the market looks attractive,” says Genov, with valuation of S&P 500 shares currently at 12.8x 2011 price to earnings.
Growth investors will be focused on Asia and emerging market stocks. Income investors, will be turning to investment grade local currency debt in countries like Brazil.
“We expect Asia and emerging markets to start to take off later this year as their central banks stop raising interest rates. We believe the US stock market will end the year up with good gains in the last quarter, not because of the US economy, but because of sales and revenue coming from Asia and emerging markets to American companies,” says Dietrich.
Dietrich, a former Republican congressman, says he is not betting on any meaningful spending cuts within the next 12 months, especially during an election year. With the US debt bubble still firmly in place, Dietrich says investors should expect oil, commodities, gold and precious metal prices to rise again later this fall after taking a breather over the summer.
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