Today we got some encouraging economic news. Second quarter revised GDP came in better than previously thought, showing a strong 3.7% growth and better than the initial reading previously reported of 2.3%. It’s a very solid number.
And yesterday and today the markets are bouncing back nicely, following a nice reprieve from the chaotic selling in China.
However, I would caution against too much euphoria. The economic data is backward looking and it should be taken accordingly. The bounce is expected after a severe drubbing the past couple weeks; nothing goes down in a straight line.
The reasons I’m sticking with my statement the bull market is dead is for a number of reasons which I’ve highlighted previously. The facts have not changed for me to adjust my outlook.
Interest rates are on the way up regardless, especially on the fringes. Therefore, the dollar will continue to strengthen steadily, especially against emerging economies which pose the greatest global risk. Risk is still adjusting as bankruptcies and defaults continue to climb. Corporate profit margins have peaked and earnings growth is slowing and likely to head south moving forward. Wages are the biggest component of company costs and these are undoubtedly rising due to a low unemployment rate, adding profit margin pressure. Overseas profits have also peaked.
So on net, company earnings cannot drive this market higher and Fed intervention is winding down.
The greater China affect will impact economies and markets over the coming quarters with greater severity.
Until we see commodities begin to recover, I’m very negative on global growth.
Previous brief selling crises in the past 5 years have been politically driven – the US government shutdown fears, Greece worries, southern European default worries, and the Fed ending QE worries.
This selloff and mini crisis is more fundamental and will therefore have more lasting consequence. The markets will not quickly and fully recover.
The bull market is still dead.