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Ask our strategists a question

How can the Feds raise rates in this environment because we have doubled the debt in the last 8 years and a significant increase in rates would appear to increase our payments to service the debt. Any thoughts?

There are a lot of ways to approach this and in theory you are correct. High debt with higher interest should be dangerous. Unless of course the Fed owns a substantial portion of the US government debt. The $4 trillion or so with interest is paid to the US treasury. All things being equal if interest rates go up due to economic growth and pricing power then tax receipts will go up too. Interest is not the big problem though. Unfunded liabilities like for Medicare and social security is far worse. Again growing the economy is the best solution.

April 25, 2016: Should I "Go away in May." I am up to date. The election scares me the world events scare me. I am think the sideline is looking good until the election is over. Any thoughts?

“Sell in May and walk away” usually doesn’t work! The market follows corporate earnings and the last 3 quarters (and so far for this quarter currently being reported) companies have made less money than they did in the same quarter a year ago. This is why the market has been range bound and is struggling to move forward. However, as we move through the year company earnings look like they will be improving. Why? Oil is now higher, the dollar is weaker which will help overseas sales, the Fed has backed off raising rates four times and China has stabilized and has actually shown signs of improvement. So unless the election derails earnings growth, I think the market looks more attractive in the second half of the year than the first. Sure the election will cause some volatility in the short run but a diversified portfolio of stocks and bonds helps ride out the bumps.

Looking at the fundamental chart today (Jan. 25, 2016), isn't this a bad signal?

Corporate earnings are the fundamental driver of markets. And the fundamentals drive markets chart shows that corporate earnings are not growing. This is problematic and the reason equity markets are struggling. The slowdown in global growth, the strong dollar and low oil prices are dragging down earnings. However, the U.S. economy is still doing ok. The consumer is the primary driver of GDP. Consumer spending is holding up because the employment market, housing, and cheap energy prices are supportive of a strong consumer.

Do you think we will see an uptrend in the Euro zone by year end?

In our midyear update we tripled our GDP growth target for Eurozone. Developed economies Europe, US, Japan are the bright spots as EM struggles. Germany in particular is hitting on all cylinders and Eurozone markets are up double digits this year.

Will negative earnings growth trigger a defensive position to the models?

Yes, if quarterly earnings growth for the S&P 500 year over year are negative then GPMM models and funds are moved to defensive position.

What should we be telling our clients after last week's selloff?

The Global Perspectives October 2014 article gives an in depth assessment to the issues that started with poor German reports on exports and factory orders. The other surprise was the unprecedented climb in the dollar in the third quarter creating disruption in commodity markets especially oil. The dollar rising is not especially a problem it is the speed in which it rose. The biggest concern for global markets is a lack of inflation and this makes it worse since a strong dollar essentially "imports" DEFLATION, in that it lowers prices of imported goods. Europe is the wild card since it looks likely that they are entering a 3rd recession since the end of the financial crisis. The markets are quickly erasing all gains year to date, which is very scary to investors, but we think selling is a mistake, especially before what we expect to be an exemplary 3rd quarter earnings season. Further positives, U.S. GDP hit 4.6 percent for the second quarter bolstered by consumer, manufacturing and housing strength. Although Europe is weak, they have been for the past 5 years, Emerging Market Asia is strong growing at a 5 percent rate.


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