9th August 2010
Well, America has been busy sneezing away and yet the rest of the world has remained relatively healthy. In particular, equity markets have shrugged off the weaker economic news coming from the US with ease. The main reason for this equanimity has been the strength of corporate profit growth. Can this continue to support markets in the longer term?
Looked at objectively, the US is in a horrible state. California is in a state of financial emergency . GDP growth figures for the second quarter disappointed economist expectations. The latest blow is the jobs numbers , which again came through weaker – a loss of 130,000, compared to an expected loss of 65,000. This has certainly got people worried as this thread on The Motley Fool demonstrates. The US Federal reserve is now widely expected to announce a resumption in quantitative easing.
Yet this has done little to dent the relatively buoyant mood in markets. It shaved a little off markets here, wobbled confidence there, but in general markets have managed to look beyond the data. Part of this has been the surprisingly buoyant corporate earnings data. Second quarter earnings season got off to a flying start. In just one day last week, Aviva, RSA Insurance, Barclays, Schroders, Smith & Nephew and Capital Shopping Centres all reported earnings ahead of estimates.
The situation is much the same in the US, where results from behemoths such as Microsoft, Chevron, Metlife, Intel and Apple have been ahead of expectations. Industrial groups such as Caterpillar and Honeywell have also impressed markets. In Europe German manufacturers are benefiting from the weak Euro – Siemens and VW have raised their outlook. Even in stricken Japan Honda, Hitachi and Nissan have outperformed.
Jonathan Armitage, head of US Equities at Schroders says: "Markets are responding to the strength of corporate earnings. US companies are global businesses, generating much of their earnings outside the US, and places such as Latin America and Asia continue to perform well."
He believes that the economic data may be lagging corporate data, or missing some of the undercurrents. He adds: "The Federal Reserve's data suggests that capital expenditure is not picking up as rapidly as expected. Yet there is anecdotal evidence from companies that there has been a strengthening of demand."
John Hanley, vice president, marketing and client services of Marsico Capital Management, (sub-advisors to the Gartmore US Growth and US Opportunities funds, says: "The reality is that even at a macro level the picture is not as gloomy as markets perceive. In fact, the majority of economic data currently available actually points to a broadening US recovery – these include retail sales, consumer credit, home improvements, corporate inventories, vehicle production, port activity, rail car loadings and so on."
But the big question is whether corporates will start spending again. If they do, it should quickly be felt in economic growth as unemployment drops, confidence returns and spending resumes. So far, however, they have been reluctant to invest in spite of their strength and any re-hiring has tended to be of temporary staff. At the margin there are signs of reinvestment, but it remains relatively rare according to the Telegraph and Yahoo Finance.
It would be unprecedented if they didn't start spending – it has never happened in the history of economic cycles ever. But some would argue that this is unlike any other economic cycle ever. This CNBC article outlines four things that may kick start corporate investment:
Of course, there may be an alternative – perhaps more sinister – explanation as to why no-one is too bothered about US economics as this thread on The Motley Fool discusses. Could this be the start of the end of US dominance of the global economy? Watch this space.