Tag Archives: Economy

Are Profit Margins at Risk?

With all of this talk about the economy improving and potential for rates moving higher, it got me thinking. What if we finally see higher inflation this year?

In order for this to happen, we would need to see economic activity pick up enough to require more hiring by companies. As competition in the labor market would theoretically heat up, wages would likely begin to rise, and this would create the kind of inflation we are looking for to really get our economy going. 

Don’t look now, but it appears these two “needs” for inflation may be coming to fruition:

  • Small Business Survey Upbeat (Dr. Ed)
    • “…the percent of firms expecting to increase employment rose to 6.3% in December. That may not seem like much, but it is the highest reading since October 2008. “
  • Empire State Manufacturing Activity indicates faster expansion (Calculated Risk)
    • “The general business conditions index rose ten points to 12.5, its highest level in more than a year. The new orders index climbed thirteen points to 11.0, a two-year high.”

Both of these signs bode well for the economy, but what about the market? If hiring and wages were both to pick-up, we would almost surely witness a compression of profit margins in the short term. Factor in tapering by the FED, higher yields which would be very attractive if the market loses momentum, and the ominous “warnings” throughout the market, could we actually be on the verge short-term pause or pullback in the market? How will investors respond to this new environment? Would they blindly sell on falling margins or instead turn their eyes to newly revived revenue growth from stronger consumer spending? 

Long-term, I think this is a great problem to have. However, there are a lot of “what-ifs” in the air at the moment in regards to the US equity market. Will we have a “regular” year which is up but witnesses a return of volatility and one or more 10%+ drops, or will we see a flat to down year as investors cope with compressed margins yet strengthening economic fundamentals? I remain very bullish over the long-term as we all should be, but I am becoming more cautiously bullish by the day in regards to the next 6-12 months. 

A Few Things for Tuesday

Nothing too exciting going on as far as market prices are concerned today, but here are a few things worth looking at:

Finally, I want to bring attention to this article/chart making “waves” around Wall St. and the internet in general. If you tinker around with charts enough, you can always make them reflect the opinion you wish to portray. Here’s another take on the “thesis” that this market is similar to the run up before the Depression:

While this S&P Capital chart does not address the Journal’s chart exactly, it’s the same idea with a similarly butchered chart to show a bearish tilt on the market. Of course, who am I to be surprised that somebody in the financial industry wants to spin data to favor their own outlook?

The Job Man Cometh

Good news today as the unemployment rate dropped to 7%. Fears of a taper have been silenced… at least for today… as the S&P has jumped back above 1800. Calculated Risk has provided a great run down of the employment report from this morning.

What I believe to be the greatest influence moving forward is “the end of austerity” at the state and local government level. It appears that state and local government employment has finally bottomed and is beginning an uptrend.

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Usually government jobs have increased during a recovery, but that wasn’t the case in 2009 (illustrated here). The result in the past was an extra level of protection for the economy in the wake of a recession and a quicker recovery. If governments begin to hire at a more normal pace while private sector hiring continues to build, we could finally witness the kind of recovery expected after a normal recession.

Here are a few good reads to close out your week. I hope you have a great weekend:

Happy Halloween!

I hope you have your scariest and/or most promiscuous costume ready to go for the night. Here are two tidbits to read this morning:

I’m hoping to find the time this weekend to get an original post up about where I think the market/economy may be headed, so stay tuned if you can.

All FED Up

After everyone’s “shock” that the FED didn’t begin tapering yesterday, the equity, bond, and commodity markets all rallied strongly. Here are a few links to go along with what happened and two which really have nothing to do with yesterday at all… I just liked reading them. Cheers!

Monday’s Soup for Lunch

Here are a few articles I found worth your time this morning:

Enjoy and cheers to Monday morning coffee disasters.

 

Thursday Afternoon Nap Material

On jobless claims, China PMI, and ECB rate comments, it appears the S&P 500 will close above 1,700 for the first time in history.

Here are a few links discussing those stories and a few others I find worth the time: