Alchanati Campbell & Associates
What's up Recession-on-the-way?
Markets bleeding red, GDP is green, Apple is going back to school, Tesla is dying, and bears are coming out of hibernation.
The market suffered losses for the second straight day once the dust settled on Wednesday's trading session. S&P 500: (-0.29%), DJA: (-0.04%), NASDAQ: (-0.85%), RUSSEL: (-0.04%), 10 Year:(-0.39%), Gold: (-1.33%), and Oil: (-0.89%). At one point during the day, nearly all of the above looked poised to be in the green. Alas, stock market was dragged downward, in part because of a continuing sell-off in technology. Except for that pesky VIX.
The deal with GDP. Gross Domestic Product is arguably the most important economic metric for a Nation in terms of financial health. While it is important to view it with a per capita (per person) outlook, we like to see GDP as the bottom line; and the bottom line was looking good as of this morning. In a report by the U.S. Department of Commerce, the fourth quarter of 2017 saw GDP grow 2.9%. This beat out the estimated growth of 2.5%. In 2017, GDP rose a total of 2.3%. This was much more than the 1.3% growth it saw in 2016. Additionally, Gross Domestic Income increased by 0.9%. GDI is the other side of the coin that is GDP. GDP is all about the production, while GDI is all about the income that is a result of the production in GDP.
So the economy is good…why is my portfolio red? A common misconception is that the economy and the markets (whether it be equity or debt, capital or money) are directly tied to one another. While they definitely have impacts on one another, they are not always so in sync. Take, for example, what occurred last week with the hike in rates. The rate increased is a result of a strong economy. Essentially, it is to prevent the economy from burning out, as well as fighting inflation. The rate going up is an example of contractionary policy. The economy is not always going to be in a good place. The next recession is always coming. It might not be for an extended time period, but it is on its way. When it does come, we will experience expansionary policy. The rate will go down to encourage borrowing, thus encouraging spending to get the market back on track. While the markets and the economy are generally moving in the same direction, they are not in sync. And that’s a good thing. Just because the market is not doing well does not mean that the United States is losing its way. At the end of the day, we as consumers should want this to be the case. After all, the economy of our country is of more importance in the long run.
Please give a warm welcome to our new classmate, Apple. Apple recently started an education campaign to reach kids in the classroom. They created a new 9.7-inch iPad that’s integrated with the Apple Pencil; $299 for students. They also created a new education service called Schoolwork for the teachers use in the classroom and Classkit which are educational apps in Schoolwork. Apple only has 17% of the ed-tech $17.7 billion market whereas Google has 60% of the market. Apple hopes to change this soon.
Electrocution for Tesla. Tesla shares fell as questions about a fatal Model X crash spurred up. The driver was killed on Friday and authorities are still trying to determine if the driver had engaged the vehicle’s Autopilot system. This is not the first Tesla crash involving Autopilot concerns. Tesla is down more than 26% in the last month and down more than 16% year-to-date. Tesla closed at $257.78/share and created a new 52-week low today.
How to profit from inflation. Inflation is a sustained increase in the price of goods and services and over time, inflation erodes the value of a Nation’s currency. Inflation is currently 2.21% for the month of February and as an investor, you should be aiming to earn a return greater than the rate of inflation. To do this, you would want to have investments intended to protect you against inflation like real estate, gold, oil, stocks, and inflation-indexed bonds.
Financial crisis indicators. Most indicators consider high volatility as a warning signal, but some argue that this signal is sparked after the crisis has begun which would mean it comes too late. A better alarm is provided by low volatility. Observers of low volatility are incentivized to increase risk. When volatility is low, the appetite for risk increases which increases lending of loans that are more risky which causes an increase in loan defaults. The defaults signal a banking crisis which then increases volatility.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.