US Economic Momentum Remains Positive

The US economy and especially the global economy have tremendous amounts of inertia. Once in motion, they cannot reverse course in a day, or over a few weeks. What can happen over the course of a day or a few days, is a change in the psychological perception of economic conditions. When this occurs, we usually see a panic in the markets.

It’s important to separate these two developments. Every aspect of my career has taught me the importance of data driven decisions, as opposed to perception or emotional based decisions. I can “feel” one way or the other, but my actions need to be rooted in hard data if I am to be a successful investor over the long haul. If you invest based on how you feel, or how you interpret others to feel, it’s only going to lead to trouble.

I focus primarily on analyzing US markets, and so while I’m cognizant of the impact of global conditions, I try my best to understand how these developments are going to impact our domestic economy.

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China’s ongoing slowdown is causing a lot of pain in emerging markets, which is influencing asset prices around the globe. But from an economic perspective, the US, which exports less than 1% of its GDP to China, is relatively well insulated.

On top of that, economic data here continues to remain upbeat. Consider the following:

- Labor conditions remain healthy: jobless claims are near all-time lows, job openings are near record highs, and the economy continues to add over 200,000 jobs per month.

- Corporate profits are rising, with the S&P 500 showing positive Q2 earnings growth of 1.4% (according to Thomson Reuters) even including a 56% decline in energy sector profits. Some sectors are showing robust growth (Consumer Discretionary EPS is up 12.5%, Financials EPS is up 18.5%).

- Home prices are rising at a 4.5% yoy pace according to Case-Schiller, or at a 5.6% yoy pace according to the FHFA house price index

- Personal income is rising, consumer spending is rising.

- Consumer confidence (according to The Conference Board) is at the second highest level since the end of the recession. The present situation index, a measure of current conditions, is at a post-recession high.

- Gross Domestic Product expanded at an annualized rate of 3.7% during the second quarter. This is faster than anticipated and included a 3.2% rise in business investment, which has been a sore spot recently.

These are all positives, and while each one is open to interpretation, they are all pointing in the same direction: toward economic growth and improvement.

If all these indicators were showing signs of reversing, I would be much more inclined to exit the market, calling the primary trend bearish. But the US economy is still exhibiting positive momentum, and it will take time for all these trends to slow and eventually reverse.

The preceding content was an excerpt from Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.

About the Author

Chief Investment Strategist
matt [at] modelinvesting [dot] com ()
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