The Economy Is Slowing

What shouldn’t be overlooked, is that the risk to investors is a negative impact on corporate profitability in the quarters ahead. Valuations are still a major issue for investors as corporate profits have not grown over the last 8-years. (They have only set a record recently on an “after tax” basis due to recent legislative changes.)

Of course, changing profits on the bottom line of the corporate balance sheet is not what drives the economy. That comes from consumption, and if pretax corporate profits aren’t growing, neither is revenue which is consistent with the modest rates of economic growth seen over the last decade.

This is why both the Fed, and the markets, are very dependent on “stability.” As long as no one asks the “tough questions,” the bullish thesis can continue as momentum and psychology remain intact.

Unfortunately, as seen in the last quarter of 2018, “instability” can happen very quickly leaving investors with little time to react. The recent market rout was likely a warning sign that investors should not dismiss as a “one-off” event.

  • The Federal Reserve is still looking to increase rates.
  • They are also committed to continuing the reduction of their balance sheet which is extracting liquidity from the financial markets.
  • Even if the Fed doesn’t hike rates further, rates are still materially higher than they were two-years ago which is impinging consumers discretionary incomes.
  • Earnings estimates are still too high
  • China is becoming a bigger problem.
  • Debt remains a substantial problem as default risks increase
  • Domestic economic weakness, as shown, is gaining traction
  • The Global economy is weakening at a faster pace than the US economy, and;
  • Markets have begun to show their vulnerabilities.

What happens next is anyone’s guess, but erring to the side of caution currently will likely turn out to be a good decision.

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Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Real Investment Advice is expressly disclaims all liability ...

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