U.S. Slowdown to Last 4 to 6 More Years but Stocks Hold Up

In late 2009 the Wall Street Journal reported that nearly 1 in 4 U.S. borrowers owe more than their home is worth.  With real estate prices continuing to fall over the last two years that 25% figure is definitely higher today. In Arizona recent reports put the number of mortgage holders currently underwater at 50%, with Florida at 46%, and Michigan at 38%.  What is particularly concerning about these statistics is the likelihood that many of these people, who are often also heads of households, are going to end up declaring bankruptcy.  With continued globalization, which means fewer jobs and the benefits that go with them, the demand for U.S. housing looks to remain well below 2000 to 2005 levels for a long to come. Low demand for existing housing coupled with forced selling because of near zero job growth should continue to pressure prices, driving even more mortgage holders underwater. Given that bankruptcy takes 7 years to clear it’s a logical that the surge of insolvency that started on the heels of the U.S. stock and real estate collapse of 2008, and crested in 2010, will mean at least 4 to 6 more years of a low growth to no growth economy.

We baby-boomers have seen the economic cycle play out before. What often marks the boom is people with little or no secondary educations, who were previously just getting by, who are suddenly working regularly and driving new cars or trucks. While economic slowdowns are marked by educated workers cutting back on spending following a stock market down-turn and fear of losing their middle management jobs.  What is obvious from economic ups and downs is that it doesn’t take but a few extra percentage points of growth to get a boom going, and it also does not take much to tilt an economy from slow growth into a recession.  Currently just 1.3% estimated growth is all that separates the current economy from a recession. One sad story in particular which highlighted the current slow growth state and connected the plight of both less educated people and those who have advanced degrees and never considered the effects of economic downturns was one describing how professional bar room dancers, or exotic dancers, are being forced out of jobs by the influx of more educated, younger women who several years ago would have never considered such a profession. The college degreed women need money because they can’t get the jobs they were trained for, and their parents are “no longer in a position to help them”.  And then there is the suburban mother who has been out of work for over 2 years and can’t even land a job in a fast food restaurant.  While fast food restaurants are holding their own, because people are passing up the more traditional sit-down restaurants, they prefer to hire younger workers for a variety of reasons.

The Federal Reserve is spot on in their concern for the housing market. Without some kind of a recovery in this sector the American economy will be stuck in neutral. The biggest change to the American way of life however is the loss of the great American “mark-up”. The “mark-up” was when U.S. sales managers routinely marked up goods and services by 100%. With globalization here to stay that mark-up is gone for good, and it is this dynamic that will cause the biggest change to the American economy. The rest of the working world operates on much slimmer profit margins than Americans and the current shrinkage is not temporary. While American sales people were always adept at shining things over on their own people, it isn’t the same when they try the same tactics on experienced global professionals who have spent the last two decades competing on much narrower profit margins.  The elimination of bonuses and smaller raises will be the order for U.S. workers and producers which will mean more responsible budgeting for households.  Budgeting in turn will mean more savings and steadier investment plans.

While the U.S. will definitely feel the squeeze of the world flattening, U.S. stocks should continue to hold up as American multi-national’s CEOs and CFOs have seen the above changes coming a long ways off. An impressive global footprint and a cheap currency go a long way in fending off overseas competition. And the same dynamic of globalization that is downsizing the American way of life does not have the same effect on the U.S. multi-nationals that make up the S&P 500. Because of a cheap dollar the market is seeing overseas investors buying into U.S. companies instead of the other way around.  What is a benefit to companies can work against U.S. citizens though as stock holders –owners — insist on hiring the best officers and managers in the global market, and not just in the U.S. market. The walking path along the river in downtown Chicago is seeing a lot more French and German speaking users, and they aren’t just tourists either. Even though Americans may be consuming less for a couple of reasons, for blue chip multi-nationals the U.S. is just one market in many globally. And there is the benefit to blue chip stocks from a population moving toward savings and investing and away from feeding their previous rabid consumption habits. Working Americans already contribute billions to U.S. stock and security markets on a monthly basis through 401K plans, so they’re familiar with of how professional savings/investment plan works . The real proof in a continued resilient U.S. stock-market comes from the shallow corrections when it does move lower. Certainly the QE’s have helped, but there is a reason why investors keep putting money in the S&P 500 and not taking it out. The daily S&P chart below highlights the markets current characteristic of shallow retracements. And as the old market adage goes: “the smaller the retracement, the stronger the market”.

It will be a different U.S. economy for sure going forward compared to what it’s been the last 30-years, but that doesn’t mean the quality of life can’t improve. Does wearing $160 Nike shoes, or driving a $35,000 sport utility vehicle, or watching sit-coms on a $2,000 TV really make Americans happier? Doubtful; in fact not worrying about how to pay the bills on all that stuff will actually diminish stress levels. While we make think our goal as investors and traders is to make money, it is actually to achieve peace of mind by being in control of our future.

Jay Norris hosts Live Market Exercise where he spends 12 hours per week pointing out trade set-ups and signals  in live markets. He is the author of Mastering Trade Selection & Management, McGraw-Hill, 2011, and Mastering the Currency Market, McGraw-Hill, 2009.

Trading futures or Forex is a risky endeavor and not suitable for all investors!

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About Jay Norris

Jay Norris is Director of Education at Trading University, has over 30 years of trading experience, and is the best selling author of "Mastering The Currency Market", McGraw-Hill, 2009, and "Mastering Trade Selection and Management", McGraw-Hill, 2011. He has also been published multiple times in Technical Analysis of Stocks & Commodities magazine.

3 Responses to “U.S. Slowdown to Last 4 to 6 More Years but Stocks Hold Up”

  1. What happened to stocks holding up?


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