What is the stock mar­ket say­ing?

The Denver Post - - NEWS - By Robert J. Sa­muel­son

Does the re­cent sharp sell­off of stocks sig­nal an eco­nomic slow­down or re­ces­sion?

That’s an open ques­tion. Most econ­o­mists seem to think not.

Strong job growth (2.7 mil­lion more pay­roll jobs in 2015) and low in­ter­est rates will sus­tain slow but steady growth. Still, the dra­matic stock mar­ket de­cline raises other pos­si­bil­i­ties. Af­ter Wed­nes­day’s losses, the Dow Jones In­dus­trial Av­er­age has now fallen nearly 10 per­cent for the year. It’s worth ex­plor­ing the un­der­ly­ing causes.

Here’s a short list: of stock val­ues is the price-toearn­ings ra­tio, or PE. It com­pares the mar­ket’s av­er­age stock price with the earn­ings (prof­its). If a stock sells at $10 a share and has earn­ings of $1 a share, the PE is 10. By this in­di­ca­tor, the mar­ket was high. The av­er­age PE for the Stan­dard & Poor’s 500 stock in­dex — go­ing back to 1935 — is 17, says S&P’s Howard Sil­verblatt. By con­trast, the mar­ket’s PE was about 21 at the end of 2015, sug­gest­ing an over­val­u­a­tion, by this mea­sure, of nearly a quar­ter. years ago, China’s econ­omy was grow­ing 10 per­cent a year. Now, the of­fi­cial tar­get for 2016 is 6.5 per­cent — a rapid rate com­pared with most coun­tries but much less than had been ex­pected. The up­shot is that China’s ap­petite for raw ma­te­ri­als (me­tals, food­stuffs, fuel) is also less than ex­pected, re­sult­ing in sur­pluses of many com­modi­ties. Many “emerg­ing mar­ket” pro­duc­ing coun­tries (Brazil, South Africa, In­done­sia) have been hit. Pro­duc­tion and new in­vest­ment have weak­ened. prices are con­sid­ered an eco­nomic stim­u­lus, as con­sumers save money at the pump. But it’s un­clear now how much of th­ese sav­ings are be­ing spent. Mean­while, oil com­pa­nies are lay­ing off work­ers and re­duc­ing ex­plo­ration and de­vel­op­ment bud­gets. Abroad, pro­duc­ing na­tions that rely heav­ily on oil rev­enues for their bud­gets face pres­sures to cut spend­ing. than a year, the dol­lar has ap­pre­ci­ated about 15 per­cent against for­eign cur­ren­cies, says econ­o­mist Mark Zandi of Moody’s An­a­lyt­ics. Para­dox­i­cally, this weak­ens the U.S. econ­omy: It makes Amer­i­can ex­ports more ex­pen­sive, while also re­duc­ing the con­ver­sion of for­eign prof­its from lo­cal cur­ren­cies into dol­lars. Zandi fig­ures the dol­lar’s ap­pre­ci­a­tion has cut the prof­its of the S&P 500 com­pa­nies by 5 per­cent.

The open ques­tions are how deep the stock sell­off be­comes and whether it causes ner­vous Amer­i­can con­sumers to trim their spend­ing. The an­swers may de­pend on the prof­itabil­ity of U.S. firms. We are now start­ing “earn­ings sea­son”: that quar­terly rit­ual when ma­jor busi­nesses re­port their lat­est prof­its. If prof­its ex­ceed ex­pec­ta­tions, the sell­off may abate or re­verse. If not, hold onto your hats.

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