Why global turmoil hasn't sunk US markets

Europe appears on the brink of another recession. Islamic militants have seized Iraqi territory. Russian troops have massed on the Ukraine border, and the resulting sanctions are disrupting trade. An Ebola outbreak in Africa and Israel's war in Gaza are contributing to the gloom.
Tribune News Service
Aug 18, 2014

 

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:
 
Record profits
 
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?"
 
Help from Central Banks
 
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.
 
Foreign exposure
 
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.
 
Where are the shoppers?
 
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.
 
Oil spike
 
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.

Comments

haroldrezny

Its really hard to sink the 1% of trillion aires in America when they have been making billions and billions for the last 50 years. USA could collapse economically but those people are untouchable.

Duffy

One reason the market seams unscathed by events across the pond is because the FEDS are still pumping a trillion dollars a year (or 80 billion a month)into the market. Another more obscure reason is because 55% of the trades are done by computers using algorithms that trade stocks in milliseconds in anticipation of trades placed previously but, intercepted before they can be posted.

dyankee

Exactly right Duffy. I would clarify that the term "Pumping" a trillion dollars a year into the market is better characterized as recklessly "Printing."

The other important reason why the market has not dropped as much as Obama's ratings is because the dollar is still the world's currency. This will end sooner than you think and when this happens, all hell will break loose.(garden, MRE's, chickens, well water, generator, batteries, stored fuel, assault rifles, ammo, medicine...check)

Tri-cities realist

Poor little Barack looks so tired and deflated in the picture. Perhaps an early retirement is in order so that he can really concentrate on his golf game, and not be distracted by the Middle East, unrest in Missouri, etc.

dyankee

This is how he looked when he gave his 8th grade graduation speech...not much in his experience and knowledge has changed. Had enough? You have no idea of the danger this President is putting America in.

Deliberate incompetence and hatred for any honorable success our Country has acheived....breathtaking.

Lanivan

"You have no idea of the danger this President is putting America in."

Gee, d - This sounds serious. Please tell us of the danger Obama (this president) has put us in. Is he guilty of any of the following?

* Started two of the longest US wars in history, off-budget, on the American Credit Card, costing, with finance charges, upwards of $6-7 Trillion, based on lies that when investigations into those lies commenced, managed to "lose" over 5 MILLION emails that are just now being retrieved.

* Two wars that killed and maimed thousands of US soldiers who were deployed and re-deployed over and over, putting enormous amounts of stress on already compromised VA system, and then ignoring a major report that predicted terrible delays in health care when those soldiers finally came home for good.

* An explosion of Big Government with the creation and signing of bills that expanded government via the Homeland Security Act of 2002, the Patriot Act, the very expensive Medicare Part D, just to name a few.

* A lack of oversight and outright mismanagement of financial institutions that helped to create the worst US financial and economic collapse since 1929, of global proportions, with a subsequent catastrophically weakened employment picture.

* Invaded a country known for hundreds of years of violence, stupidly and naively believing he could create a democratic state.

Please d! This is serious!

Tri-cities realist

I'm curious, do you have your Bush bashing talking points memorized or do you copy and paste?

Lanivan

Totally memorized, after years of pointing out Republican hypocrisy when claiming Obama is the worst president ever.

Every point has been carefully researched, and is easily fact-checked for accuracy. If you think these are simply "Bush bashing talking points", you haven't been doing your homework, and are part of the problem.

The fact is - Bush was so bad, and the damage to the country so great, and it will take so long to rectify, it only SEEMS like these points have to be made up.

But at least you asked a question - my comment was in reply to dyankee, who flies in, lays a few bombs, and then is gone again without so much as a fare thee well.

Straightjacket

I used to think Karen Lewis from CTU fame was the most embarrassing public speaker representing the decline of America, then came Obama.

Mystic Michael

Where are the shoppers? News flash, economic policy makers - and especially Republican Congress members: To maintain a healthy consumer-based economy (such as ours), ordinary people, members of the 99%, must have disposable income - or the opportunity to obtain the same.

Heretofore, they haven't had it - due to something called "austerity economics", i.e. the unsubstantiated belief that, in the immediate term, it is more important to pay down the federal budget deficit - regardless of actual economic circumstances - than it is to actually GROW the economy itself, by investing in programs and policies that will preserve the purchasing power of middle-class and working-class citizens (i.e. economic stimulus), so that they then have the means by which to drive consumer demand that will in return ameliorate the effects of recession, i.e. unemployment, etc.

It's really not that difficult a concept to grasp - to anyone without an ideological axe to grind.

Measures that do NOT stimulate consumer demand:

* Giving away huge, regressive tax breaks to billionaires who don't need them; who will only hang onto the extra cash, rather than investing it in new enterprises and ventures

* Giving away billions in corporate welfare - with no strings attached - to some of the wealthiest, most powerful corporations in the world, under the pretext of "incentives" that will "persuade" them to invest in new job-creating activities that they have no intention of actually creating

* Looking the other way while wealthy, powerful corporations engage in corporate "inversions", transferring windfall profits into offshore investment accounts, and engage in similar unpatriotic acts of economic treason - at the expense of the federal Treasury, and the welfare of our country as a whole

* Allowing corporations to export millions of American jobs to Third World economies, typically providing a tiny fraction the amount of pay of American-based jobs - all so that American executives and board members can maximize their own incomes, at the expense of their fellow American citizens

Tri-cities realist

So what do billionaires and corporations do when they get more money? Put it under their mattress? Bury it in the back yard? Or do they either invest it or put it in the bank, both of which spur further economic activity and growth? Or sometimes they even spend it, who'da thunk?

As for corporate inversions, do you support reducing the corporate tax rate, thus removing the financial incentive of moving money offshore?

Lanivan

The corporate tax rate, coupled with many tax dodges, affords many corporations with brainy accountants the opportunity to pay taxes at very low rates- if at all.

It's been shown that the middle class and working poor generally spend their money (savings are at all-time lows again), and the wealthy save it. The very wealthy move it offshore. I posted a study a while ago that showed that the amount of wealth being stored in tax-free dodges around the world now is in excess of $1 Trillion.

 

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