Wasington, D.C. -- (ReleaseWire) -- 03/19/2015 --Despite wide swings in the market last week, stocks are still trading at near record high levels. This is amazing, considering all the macroeconomic data released recently. The market simply isn't responding to the facts on the ground, so perhaps we should follow suit.
We've just recorded the highest inventory-to-sales ratio since the Lehman Brothers meltdown, which means that retailers simply aren't able to move the stock they have on hand. Forget about that, though. It seems the market has. U.S. oil rig counts have dropped for almost the 14th week in a row and are plummeting at the fastest rate in 29 years. Forget about that, too—the markets, the S&P, the dollar are all running up. Goldman Sachs last week confirmed that the U.S. macroeconomic numbers are at their weakest since July 2011, and are falling at the fastest pace in three years. The Baltic Dry Index, which measures the cost of shipping commodities on the largest cargo ships, is at a near record low, down over 60% year-over-year. This reflects the fact that buying, selling, shipping, imports, exports are way down, and builders and shippers are seeing losses in the billions and even filing for bankruptcy. Forget about that, too, just look at the markets! U.S. earnings are slumping—S&P 500 earnings were down -12% in the most recent reporting period. The government reported that consumer spending fell in February for the third month in a row. The University of Michigan consumer sentiment poll just released indicates that consumer confidence is tumbling the most it has since 2006. Forget all those things. The markets say the economy is running on all cylinders.
According to Bank of America Merrill Lynch, even the U.S. dollar is set to have its strongest quarterly strengthening since 1992. A strengthening dollar shouldn't be seen as a net positive, though. When the dollar experiences significant gains, it does so against other currencies, which mostly happens during periods of extreme financial or geopolitical distress. In the last 45 years, we have seen four huge upward movements in the value of the dollar, and each time the outcome was negative. The market crash of the 1980s because of Fed Chair Paul Volcker's shocking interest rate hikes, which were motivated by a strengthening dollar and the inflation that resulted. The first Gulf War was preceded by a runup in the dollar. The ejection of Britain from the European Exchange Rate Mechanism (ERM) in 1992, likewise. The collapse of the Lehman Brothers firm was also preceded by such a runup. Today the dollar is rising at a greater rate even than it was at that time. The impact is certainly going to be negative, if not catastrophic. To quote the statement from Bank of America Merrill Lynch, "In our view, another concern is that the move in the U.S. dollar reflects a dislocation within the financial system. Capital flight to the U.S. is a symptom of systemic risk in financial markets. Certainly dollar shocks in the past have been associated with major market events …"
The dollar has been the one central conversation of the last week. A strong dollar affects historical returns and earnings-per-share, and despite the fact that the market seems to be ignoring it, this will eventually impact stock prices, so investors are right to be cautious. In a report issued recently by Goldman Sachs, it was revealed that such companies as Procter & Gamble, Johnson & Johnson, Google, DuPont and McDonald's have started to comment on the negative impact to their bottom lines resulting from the strengthening dollar. Even Intel stepped up and lowered its guidance for the first quarter revenue from $13.7 billion to $12.8, which is a significant drop. These are likely just the first of the warnings we're likely to receive from U.S. companies in the coming weeks.
Despite all this, the Federal Reserve is doing everything but raising interest rates. As Upton Sinclair once wrote, "It is difficult to get a man to understand something, when his salary depends on his not understanding it!" Investors really shouldn't forget about the real macroeconomic data, and neither should the Fed, but they seem determined to.
Along with the rising dollar, the most significant news of last week was falling oil. On Friday, March 13th, oil hit a low of $44 per barrel. Lower gas prices are seen by consumers as a relief, a lessened drain on straining pocketbooks, but there are negative consequences both geopolitically and economically. Even personally. South Dakota State University sociology professor Guangqing Chi conducted a study in which he analyzed traffic and accident data, and in a report featured by the Huffington Post in January, concludes that a $2 drop in the price of gasoline could result in as many as 9,000 additional traffic fatalities annually as lower gas prices lead to more driving.
The Saudi plan to shake out certain global oil producers by artificially driving down prices is clearly on its way to working, and President Obama is more than happy to take the credit for the short-term economic benefits. In February, he said, "A lot of families are saving a lot of money at the gas pump, which is putting some smiles on folks' faces. You're welcome." Will he accept responsibility for the job losses as energy producers are forced to close operations, lay off workers, and even go out of business? The oil industry employs 215,000 workers, 112,000 tied directly to production in a non-managerial capacity. These jobs are exceptionally well-paying, representing $8.7 billion in annual wages at risk because of lower gas prices. Most of our recent growth in jobs has been in states with shale oil and gas production, so the impact could even be disproportionately more significant than it appears on the surface.
Jeffrey Gundlach, founder of investment firm Doubleline Capital, said recently, "Oil is incredibly important right now. If oil falls to around $40 a barrel, then I think the yield on the ten-year treasury note is going to 1%. I hope it does not go to $40 a barrel, because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be, to put it bluntly, terrifying." Even aside from the global economic and geopolitical consequences as oil-dependent economies suffer under the weight of OPEC's strategy, there are clear risks at home.
Bridgewater and Associates estimates that lower oil prices will impact the economy negatively, placing a drag on real growth of GDP of as much as 0.5%. One contributor is increasing debt defaults from energy producers, laid off workers, and the foreign debt of oil producing countries that is payable in U.S. dollars. Low oil also leads to deflation, followed by reduced spending as consumers wait for their money to be worth even more. Reduced spending leads to increased inventories, which we're already seeing. All this taken together is fertile territory for recessionary trends.
Once again, though, forget all that. The market doesn't seem to care, right? Why should investors? (That's still bad advice... don't forget. Be aware. Ask questions. Pay attention.)
All data sourced through Bloomberg
Securities offered through Western International Securities, Inc., Member FINRA & SIPC. Bennett Group Financial & Western International Securities, Inc. are separate and unaffiliated companies.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org