In my line of work, I come across thoughtful perspectives, reasoned opinions, and flat-out nonsense. The latter I simply dismiss, but thoughtful and reasoned are not easy to shun, even when they go against my own line of thinking.
Hence, I just read an article this morning that suggested the market was getting ahead of itself, especially since the recent US economic data has not been superlative. The writer’s case for the recent economic data was both thoughtful and reasonable, which makes it difficult for me because, although his case was thoughtful and reasonable, I have to disagree.
You see, the market is not always cognitively in the present. In fact, many analysts and market watchers will tell you the market is always cognitively in the future, some 6-9 months in the future. Thus, if this is true, then the economic data from the third and four quarter of 2014 is of relatively little use in understanding where the market is going in the future.
So, I make my counterargument to refute the idea that the market is ahead of itself and I base my argument on what the world will look like 6-9 months out, economically speaking. I can sum my argument up in one word – Europe.
- Ireland and Spain, which have been through the wringer of austerity programs and structural reforms in return for European assistance, are now the fastest growing economies in the currency bloc. Portugal too is perking up.
The black sheep, the economic bad boys of the PIIGS are changing their colors, stripes, and spots. They have reformed and that means they are now beginning to reap the rewards of the efforts Greece is now resisting.
- Another encouraging sign is that lending to businesses in Italy and Spain is picking up following last year’s ECB stress tests of European banks and their interest rates are falling, narrowing the gap with the euro zone core.
Yup, the big dogs of the EU are now beginning to bark again, and that is because they have worked hard, suffered much, and are gathering some economic momentum
- Italian Prime Minister Matteo Renzi has introduced a jobs act to ease hiring and firing and is making progress on reform to streamline parliament and the electoral system.
- French President Francois Hollande’s government has just rammed through a bill to loosen some shackles on business such as Sunday trading and plans new steps to ease labor regulation.
- There are also signs that France and Italy, the euro zone’s second and third largest economies, are finally tackling some of the economic reforms that politicians long feared to touch, albeit at a slow and gradual pace.
And the really big dog in the EU is steadily continuing to lead the pack with solid strides and lengthy leaps.
- German wages are rising faster than prices, giving a boost to consumer spending and raising the prospect that inflation in the bloc’s biggest economy may outpace the rate in southern Europe for several years. That would make economic adjustment more symmetrical, and less agonizing for the south.
So, even though the lagging US economic indicators appear to be slowing when put on an historical scale, they are still good enough to keep the US economic momentum going, which is all that the US economy has to do while it waits for Europe to begin buying US made goods again and for Europe to spark the global economy, oh, say, some 6-9 months out.
Is the market ahead of itself? Well, yes, but if it can stay mellow, the rest of the data will catch up.
Trade in the day; invest in your life …
