Economical & Financial Landscape in the US

A Look at the Economical & Financial Landscape in the US

The US stock market has started the year 2019 on a positive note. The S&P market, NASDAQ, and Dow Jones have all surged during the first two months.

The rally in the stock markets is partly fueled by the positive expectations of the US-China trade deal. Investors are optimistic about the trade deal that is in the final stages.

At the moment, the S&P 500 is trading at nearly 16 times the earnings estimates for members companies of $172.50.

But some financial pundits say that the market is fully baked and that there won’t be positive gains in the coming months.

While the first two months have been the best for the S&P 500 since 1991, market pricing seems to be not in sync with the economic position.

The stock market does not reflect the slowing global economy, downward revisions of US economic growth, Fed’s expected tightening policies, and fears of a long overdue recession.

In this context, the stock prices are too high and a correction is expected in the months ahead.

Bonds markets, in general, have largely remained unchanged despite a decrease in the long term rates.

The 10-year Treasury rates that are the main indicator of the bond market had decreased to 2.64 percent at the end of February from 3.24 percent at the end of last year.

The Feds had increased the rates ending the zero rate policy that has been used for the past 10 years. Experts state that the decision of the Feds regarding the Treasury rates would affect the demand in the market.

Employment Data Show Positive Results

Despite a slowdown in the economy, the employment rates have increased this year.

Non-farm payroll had posted the highest gains since the middle of 2016. The sector had added 240,000 new jobs last year.

Private companies in the country added nearly 183,000 employees. This is in line with the estimates of the Down Jones of 185,000.

The strong employment data in light of the slowing economy has puzzled experts. Despite a slowing economy, it continues to crank out new job opportunities.

Unemployment in the country that was 6.3 percent by the end of 2018 continued to fall this year due to the increased job openings.

The biggest increase in the private sector came from the business services with 49,000 new positions. Moreover, the health and education services added nearly 39,000 workers.

Construction, financial, and manufacturing sectors added 25,000, 21,000, and 17,000 positions, respectively.

The service industry, in general, had added a total of 139,000 new jobs, while the manufacturing industry was responsible for 44,000 new jobs.

Most of the jobs were added by medium-sized companies that employ between 50 and 499 employees. The companies had added 95,000 jobs. Meanwhile, small businesses added 12,000 jobs and large firms added 77,000 jobs.

Worsening Trade Deficit

Trade deficit continued to increase this year reaching the highest level in the history last year. The country imported a record number of imports, especially from China.

The growing trade deficit represents a setback for President Trump who had started a war on trade.

Last year, President Trump had imposed tariffs on aluminum, steel, solar panels, washing machine, and many other goods.

But, instead of closing the trade gap, the policies of Trump seems to have backfired with the trade deficit growing by 12.5 percent since 2017. According to a Commerce Department report, the trade deficit at the end of 2018 had increased to nearly $621 billion — an increase of $70 billion.

The United States’ trade deficit with Mexico and the EU increased by more than 10 percent, due to imports rising faster than exports.

A lot of economic factors explain the increasing trade deficit.

The global consumer appetite for American goods had decreased due to the strengthening dollar. The greenback had increased for the fifth day this week that will further reduce the international demand for US goods.

On the other hand, the increasing dollar value has made international goods cheaper for most Americans. This has resulted in an increase in imports fueling the trade deficit.

A Slowdown in Consumer Spending

Consumer spending accounts for nearly two-thirds of economic activity in the US. In the last quarter of 2018, consumer spending had increased by about 2.8 percent. However, the spending had decreased by 3.5 percent as compared to the previous quarter.

Recent statistics show that retail sales have decreased by 1.2 percent in December last year. In January, the demand for new vehicles decreased by 1 percent. New car sales were particularly bad dropping by 4 percent in the month.

Based on the recent consumer spending statistics, experts predict that the spending could fall below 2 percent during the first quarter of 2019.

Although business investment has increased by 6.2 percent, the first quarter would likely not be good due to the low consumer demand.

Final Remarks

In the light current economic and financial landscape in the US, financial experts emphasize tactical investment strategies.

The buy-and-hold investing strategy is no longer valid. The investment markets are different today with high investment complacency. This is not surprising due to the decade long rally in the S&P 500 and near zero-rate of bonds.

Still, investors need to be ready for a decline in the market in the event of changing political and economic situations. The looming Brexit and lack of a deal with China could result in companies backtracking from investment commitments. They may hold their expansion plans in the event of reimposition of trade tariff.

The trade war has certainly affected the US economy. It has slowed down the global economy that has caused an increase in the trade deficit.

During the final three months of 2018, the US economy had slowed to nearly 2.6 percent.

Experts predict that economic growth is expected to range between 1.8 and 2 percent in the first quarter this year. Growth in the subsequent quarters is expected to be higher ranging between 2 and 2.5 percent.