The market appears to be resting today. Who can blame it for taking a breather. After all, the last seven months have been a grueling uphill climb and it has taken a drubbing from the breathless media for making the climb. And now that the market is at record heights, it might be time to look around and take in the view. Certainly, there are important things to see, to consider rather, before making any major attempt to climb higher. What will the world look like six months from now?
Economically, the world should be a better place. Once the “spring respite” is over, this summer should look better than the last three or four for the market. Aside from the political tensions building in the Middle East (which could impact oil prices and thus impact the global economy), the big headwind facing the market this summer is the antics of the US Republicans in the House. Will the Republicans in the US Congress act out again when it comes time to raise the debt ceiling?
- House Republicans expect to pass a measure that would allow the Treasury to “prioritize” debt payments if Congress and Mr. Obama cannot agree this year to increase the nation’s debt ceiling so the Treasury can keep borrowing money to pay all creditors.
The answer is a likely, “yes,” but the theatre of it probably will not be as dramatic as it was in 2011. The problem the Republicans now have and did not have in 2011 is not only political; it is factual. In 2011, the Republicans could make an argument that the US debt was spinning out of control and that the government had to get control of the deficits. They can no longer make that argument reasonably.
Oh, they will sound off about the debt and deficits, but the fact is that the deficits are going down, and with the mandated spending cuts in place, deficits will continue to drop. As well, the government is taking in more tax revenue, both from higher taxes and from corporations and workers making more money. This will reduce the deficit further. On top of that, one huge drain on taxpayers is finding grace in the housing recovery and it is showing its gratitude.
- Fannie Mae, the nation’s biggest mortgage finance company, on Thursday said it will pay $59.4 billion in dividends to the U.S. Treasury after a record profit in the first quarter that reflected a multibillion dollar tax-related gain.
My guess is this summer will actually be quite anti-climactic politically and the market will like that. This, then, raises the question: what other headwinds are there to stop the market from climbing higher? One answer is earnings and valuations, but those are dependent on the economy and if the economy keeps improving, even at its current pace, those should be fine. So, maybe the better question to ask is: what are the headwinds for the US consumer, since the US economy depends on consumer spending?
Possibly, the mandated spending cuts coming toward the summer and end of the year will impact job growth, which has been doing much better lately, despite the push for austerity.
- The number of Americans filing new claims for unemployment benefits dropped to its lowest level in nearly 5-1/2 years last week, signaling labor market resilience in the face of fiscal austerity.
We will certainly see if those cuts have a negative influence on consumer spending, but it appears right now that the market is not seeing the fallout from the spending cuts as negative six months from now.
If anything, one worry simmering in the back of the market’s mind is inflation related to an economy heating up. Will energy and food prices rise again this summer. One key to that is the price of oil. Recently, it has been stable, but as global economies shift into higher gear, will the current oversupply offset greater use, or will oil spike, causing gas prices to go up, which reduces consumer discretionary spending?
- Oil fundamentals remain biased to the bearish side as supply is projected to continue to outstrip global demand in the second quarter (see summary of latest EIA STEO report below) resulting in global inventories moving into a building pattern.
Right now, the market can coast for a bit, and I suspect it will. Expect some sideways trading, an occasional “freak out” at some news (slight corrections here and there), and the breathless media to keep putting out reasons why the market momentum cannot last. In the meantime, get out there and make your money work!
Trade in the day; Invest in your life …
