by Hal Eddins, Managing Director, Capital Investment Council
It seems impossible to escape the Presidential election hoopla, and with the respective national party conventions just around the corner, the noise will only get louder. The election agenda of both Republicans and Democrats sometimes feels as if its aim is to make us feel as lousy as possible about both ourselves and our country. Mr. Obama never misses an opportunity to point out how poorly Mr. Bush has done; that’s only natural as Mr. Obama wants the voters to be aware of the changes he has in store should he be elected come November. Mr. McCain has the trickier job of distancing himself from the current administration while also promoting his own version of change. Mr. McCain’s difficulty is that he can ill afford to offend the loyal voters of his own party. The upshot of all this is that some of us feel worse about America than we did way back in 2000. That may be about to change.
The economic difficulties we have endured over the previous two years have provided a convenient pulpit for the critics of the American way of life. The list of woes seems to grow by the day: the housing crisis, rising jobless rates and high gasoline prices. Those critics include foreigners as well as citizens of our own country. There was a recent skit on Saturday Night Live featuring actors playing Saddam Hussein, Gaddafi and Kim Jong-Il. The three “dictators” spend most of the skit talking about the evil that America is doing as a country and how they will send their terrorists to strike and bring America to its knees. The funny part comes at the end of the skit when the moderator asks each evil dictator in which country he would prefer to live if he could live anywhere in the world. Of course, they all answered America!
Pundits are unsure if America has or has not entered a recession, but they seem willing to admit that economic growth has slowed. The common wisdom in the investing world over the last five years involves the concept of “decoupling”. In other words, overseas growth in countries like China, India, and Brazil is so strong that weakness from the United States could not affect that growth. However, recent data shows that economic weakness is spreading abroad. Growth in the European Community has slowed in the last six weeks. Jean-Claude Trichet, the President of the European Central Bank seems prepared to ignore this warning. Mr. Trichet is more concerned with inflation and this stance leads him to press his view that European interest rates must remain high.
If growth continues to deteriorate, Europe's policy of high rates coupled with slow growth could prove costly. The beneficiary in all this has been both the U.S. stock markets and the U.S. dollar. The dollar is currently at six month high versus the euro, and the stabilizing effect of a rising dollar could persuade foreign investors to place their cash into our domestic stock markets. That would be a welcome change as the U.s. markets have underperformed compared to their world counterparts since 2000. The Financial Times reported on August 12th that U.S.equities have underperformed the MSCI EAFE by 37% since 2002.
I’m quite excited about the 2008 Summer Olympics. It is seems that the Olympics are
China's “coming out” party. If this is China’s party, I wonder if there will be a hangover. Currently the Chinese stock market indices are in a position of weakness. The Shanghai Composite has used the 3000 price level as technical support for the last 30 months. Recent weakness has driven the Composite down to the 2700 level. To put this in perspective, the Shanghai Composite traded at over 6000 just 9 months ago.
Continuing the Olympic theme, it was no accident that the Beijing Games began on last Friday; the date was “8-8-08,” and many Chinese consider eight to be a lucky number. In addition to last Friday’s fireworks in the “Bird’s Nest” stadium in Beijing, the Dow Jones Industrial Average decided to stage some fireworks of its own. The Dow recorded a gain of 302 points. While I remain constructive on the economy and markets over the next 18 months, I believe the market still has some work to do before it can rally consistently. Data shows that there have been twenty-four daily Dow gains of 300 points or more. Unfortunately none of those 300 point days occurred within a bull market. Still, there are positives to be taken away, and a market pause in the near future would allow us to add to some of our favorite companies.
I’m optimistic by nature. I simply point out the flaws of many of the overseas markets in order to extol the virtues of our own U.S, markets. Much of the overseas growth has been driven by strength in commodities. The commodity cycle could be nearing an end. Oil has dropped 23% in the last three weeks. Gold has seen a similar drop. In addition, the U.S. dollar has begun to rally. Another hint of what may be to come is the performance of the Russell 2000 Small Cap Index. While the Dow and S&P 500 are down 12% each so far this year, the Russell is only down 2.7%. The stocks of the Russell 2000 tend to be economically sensitive, so the relative strength of the Russell could point to an upward turn in the economy in the coming months.
Growth may be slow in the US at the moment, but in the view of investors, slow growth is preferable to no growth. We have seen investors leave the Chinese markets, but we have not yet seen them invest heavily back into America The stabilization of the dollar could provide the spark needed to persuade foreign capital to invest here. Some experts claim that there is no correlation between the stock market and the price of oil. I beg to differ. When oil takes up as much of the purchasing power of the average consumer as it does currently, retail sales are adversely affected. The recent drop in the price of oil could help spur an increase in August retail sales. Additionally, this is a time when shoppers spend more because of the “back-to-school” season. This upside jolt could help rejuvenate retail growth at an important juncture.
In closing, no matter what you read or hear, it is a good time to be an American. The stage has been set for change-no matter who wins in November. Sometimes the idea of change can be as effective as change itself.
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Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment. Capital Investment Counsel reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage of an account's portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. All recommendations within preceding 12 months or applicable period are available upon request.
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