Why global turmoil hasn't sunk US markets
Tribune News Service
Jul 21, 2015 at 2:58 PM
It's been a grim summer in much of the world. U.S. stocks sagged Friday on reports that Ukrainian troops attacked Russian military vehicles that had crossed the border. But investors in the United States have been shrugging off most of the bad news — so far at least.
A big reason is that five years after the Great Recession officially ended, the U.S. economy is showing a strength and durability that other major nations can only envy. Thanks in part to the Federal Reserve's ultra-low interest rates, employers have ramped up hiring, factories have boosted production and businesses have been making money.
All of this has cushioned the U.S. economy from the economic damage being suffered abroad. And investors have responded by keeping U.S. stocks near all-time highs.
"We're in a much better place psychologically," says Mark Zandi, chief economist at Moody's Analytics. "And it's allowing us to weather the geopolitical threats much more gracefully."
Still, the global turmoil comes at a delicate time.
China, the world's second-biggest economy, is struggling to contain the fallout from a runaway lending and investment boom that's powered its growth since before the 2008 financial crisis. The economies of Japan and Germany, the world's third- and fourth-largest, shrank in the spring. So did Italy's.
It might not take much — an oil-price spike, a prolonged recession in Europe, a plunge in business or consumer confidence — to derail the global economy.
Here's a look at the strengths and weaknesses of the U.S economy and others, and why the calm in markets may or may not last:
Earnings at companies in the Standard and Poor's 500 index are on track to jump 10 percent in the second quarter from a year earlier, according to S&P Capital IQ, a research firm. That would be the biggest quarterly gain in nearly three years.
That news has helped the S&P 500 index climb 5 percent this year, extending a bull market into its sixth year. The gains have been remarkably steady, too. The stock market hasn't suffered a "correction" — a drop of 10 percent — in nearly three years, twice as long as is typical.
Still, some markets outside the U.S. are falling.
Japan's benchmark Nikkei 225 is down 6 percent this year. Germany's DAX has lost nearly 5 percent, and France's CAC 40 is down 3 percent.
At the same time, global investors have been pouring money into U.S. Treasurys, long seen as a safe bet in troubled times. The yield on Treasury notes maturing in 10 years, which falls when demand rises, hit 2.3 percent on Friday, its lowest level in more than a year.
Christine Short, a director at S&P Capital IQ, worries that more grim news from abroad could send U.S. stocks tumbling. "Markets are ripe for correction," she says. "The only question is, What is the catalyst?"
The Fed has been paring its pace of bond purchases and will end them altogether this fall. The purchases have been intended to hold down longer-term rates and prod consumers and businesses to borrow and spend. But the Fed has stressed that it will keep short-term rates at low levels even if unemployment reaches a level usually linked to rising inflation.
Before raising rates, the Fed wants to see "the whites of the eyes of a real recovery and wage growth," says Diane Swonk, chief economist at Mesirow Financial.
Many economists project that the Fed won't lift short-term rates until mid-2015. Another plus for economies, at least in the short-term: The Fed's low-rate policies have influenced other central banks.
The Bank of Japan is buying bonds to stimulate growth and the European Central Bank is facing calls to do so itself.
Though the U.S. economy has managed so far to withstand the economic and geopolitical turmoil abroad, it isn't immune to it.
And the bad news kept coming this past week.
The 18-country eurozone, a key region that emerged from recession last year and accounts for nearly a fifth of global output, failed to grow at all in the second quarter of the year. "The European recovery is faltering," says Jack Ablin, chief investment officer at BMO Private Bank.
Escalating tension between the West and Russia isn't helping. Exports from the eurozone to Russia account for less than 1 percent of the region's economic output. But Germany, Europe's largest economy, is vulnerable. It gets nearly all its natural gas from Russia. The German economy contracted 0.2 percent in the second quarter compared with the previous quarter. And business confidence in Germany is plummeting.
Tom Stringfellow, chief investment officer at Frost Investment Advisors, says the tit-for-tat sanctions between the West and Russia over Ukraine could push the eurozone over the edge. "Unless that is resolved quickly, you could see another recession," he says.
Nearly half of revenue in the companies in the S&P 500 comes from selling abroad. And exports contributed 14 percent of U.S. economic output last year, up from 9 percent in 2002.
Retail sales stalled in the United States last month. Wage growth has failed to surpass inflation, leaving many consumers unwilling or unable to spend more. Sales at auto dealers and department stores fell in July.
Wal-Mart this week cut its profit outlook. Macy's trimmed its sales forecast.
"Consumers are finding they can live without a lot of the stuff they used to buy automatically," says Joel Naroff, president of Naroff Economic Advisors, in a research note. "Right now, people are just not parting with their hard-earned funds."
It's not just U.S. consumers who are spending less. Japan's economy cratered in the April-June quarter, due to a sales tax hike. The economy there shrank 6.8 percent from a year earlier. And shoppers face another sales tax increase in October 2015.
Will fighting in Iraq and Ukraine upend global energy markets, and raise the cost of filling your gas tank and heating your home?
Europe is worried because it gets much of its natural gas from Russia. And Iraq is the second-biggest OPEC oil producer. Before dropping last month, crude oil prices hit a 10-month high in June on news of victories by Islamic State fighters.
In the United States, gasoline is averaging $3.47 a gallon, according to AAA. That's down 7 cents from last year. But the benefits of cheaper gas could be erased if supplies were disrupted. Consumers would be hit by what economists consider the equivalent of a tax increase.
One positive to come out of the dire economic situation? Because so many countries are struggling to grow, demand for oil is restrained. On Tuesday, the International Energy Agency lowered its forecast for global demand this year.