As I write this, stocks are poised to rebound this morning after closing down quite significantly over the last few days. While the rebound won’t get the market back to recent levels, it’s a start. I have borrowed some analysis provided by First Trust that came out yesterday. Brian Wesbury is an economist I follow closely. Here’s what he had to say and a link to the full commentary is provided as well.
Shorts get power from fear and confusion, and nothing creates fear like the belief that market declines are being caused by some fundamental problem.
We don’t see any serious fundamental problems.
1 – Private sector jobs have increased for 65 consecutive months. There is unambiguous improvement in housing and construction taking place. Auto sales are near record highs, and rising. Yes, it’s Plow Horse growth, but profits, outside of energy, continue to grow. Using total profits, or forward-PE ratios, which include the drop in energy profits paints a distorted picture.
2 – Since the crisis of 2008, pundits have convinced themselves that the bull market in stocks is because the Fed, and Quantitative Easing, have created a “sugar high.” By definition, taking away the sugar is painful. But, there is no “proof” that QE is responsible for record high corporate profits. M2 (the money supply Milton Friedman told us to watch) has continued to grow at about a moderate 6% per year.
3 – Even though tapering didn’t end the world, now they say rate hikes will. But, seriously, is there anyone out there who thinks a 0.375% federal funds rate will stop the iPhone7 from being introduced? There are still massive amounts of excess reserves in the system, and paying banks even 1% for those reserves (instead of 0.25%) is not going to cause the money supply to shrink.
3 – Yes, China is slowing. So what? Exports to China make up 0.7% of US GDP.
4 – The very same people who three months ago were saying the Chinese yuan would be the new reserve currency, now say Chinese devaluation is calamity. Which should we fear, a rising or falling yuan? Answer, neither.
5 – Corrections are about moving capital from weak hands to strong hands and are always scary, especially when the pundits argue loudly that the correction is due to fundamental factors.
As I’ve written in the past, the stock market is not the economy and the economy is not the stock market. Don’t panic. You can’t control the market. Don’t let it control you. More pertinently to most of the readers of this blog, Verso announced a major reduction in paper capacity last week. If demand isn’t increasing, eventually supply rationalizes itself. I have a feeling Verso’s actions are going to have a bigger impact on most of our lives than the stock market swoons. Focus on what you can control. Don’t panic.