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IS THE SKY REALLY FALLING?

by | Jan 7, 2016 | Articles

We certainly have had a roller coaster ride with the equity markets. As most of you know, there are several factors that are causing this current round of volatility:

First, the unrest in North Korea; the idea that a rogue state such as North Korea has developed a hydrogen bomb to use as blackmail against the rest of the world is unsettling.

Second, China continues to attempt to transition its economy from manufacturer to the world to one closer to Germany where manufacturing is still large but domestic consumption is also significant. The Chinese government has yet to figure out how to coax its citizens to spend! Until the government either gives up on its transition or the citizens’ start spending their way out of the current economic malaise, China will have problems.

Third, the Middle East continues to be a hotbed of terrorism and unrest. The forces in place and moving have not really changed much since prior to the 911 event that precipitated the US entering its longest ground action in its history. We continue to see Iran and Saudi Arabia having proxy war in Yemen with both countries increasing oil production to finance costs. The result is lower oil prices.

Fourth, Europe has a crisis concerning 2 million mostly Middle Eastern refugees streaming into their territory.

Fifth, newish technology in the energy field has erupted in more oil and natural gas than the world consumes being pumped out of the ground daily. With energy comprising approximately 20% of the S&P 500, the drop in prices affects these stocks greatly, the drop harms the energy and alternate energy industries but benefits the consumer which drives about 70% of the economy. With Iran about to have sanctions lifted so it can sell more oil and Saudi Arabia desiring to hurt Iran and raise revenues, we believe oil prices will continue to be weak. This is not new and overall helps the US economy.

Sixth, commodity prices are weak because China is reducing manufacturing and has built its infrastructure to a great extent. Weak commodity prices will mean lower prices for consumers and are a net plus to America and developed Europe but bodes poorly for Canada, Latin America, emerging economies and Australia that depend upon high commodity prices to bolster their economy.

Seventh, US presidential Elections always brings uncertainty. The presidential elections this year is a bit noisy and crazy. Unless Hillary Clinton creates a disaster it seems most likely she will be the Democratic nominee and the Republicans seem to be performing some sort of ritual suicide going into the elections. So unless there is a major breakthrough on the Republican side, Hillary Clinton is most likely our next president and that is probably good for investors.

Eighth, we have record amount of employees retiring daily as the baby boomers retire at a rate estimated at about 10,000 per day. At the same time, we have a record number of Millennials entering the workforce estimated at greater than 10,000 per day. Currently we have 100 million Millennials in our work force making them the single largest generation influencing the productivity of the economy.

With all these factors spewing into our mix and the stock market gyrating what does this mean for your portfolio and the US economy. First, most of the situations outside of North Korea, terrorism and a war in the Middle East bodes well for the US economy. Second, the Millennials are new to the workforce and less productive just like the Baby Boomers were in the mid to late 1970s through 1985. Once the Boomers learned their positions and became more productive, the US economy and stock market rose greatly for the next two decades. We expect the same thing with Millennials and are beginning to see signs of the same pattern that the US witnessed in the late 1970s, 1980s and 1990s. We expect rents to increase which will make purchasing a home more attractive and then housing to grow and help Millennials buy new homes over the next decade or two. This is all good for the economy.

As we said above, outside of a terrorist attack or another war, these factors listed above are positive to the US economy and the stock market in the long run if not over the next few days and weeks. We suggest that people add to their equity positions during this time and expect you to be rewarded over the long term.

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