Wells Fargo, Dr. Sohn's "Stocks: Irrational Pessimism?, Global Recession?" +...
"Stocks: Irrational Pessimism?" +...
drsohn.com <---accompanying charts & stats
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Rearranged some.
>>> Dr. Sung Won Sohn
Chief Economic Officer
Wells Fargo & Co.
(612) 667-7871
Sept. 10, 2001
FINANCIAL MARKET STRATEGIES
Date Indicator For Estimate Consensus* Previous Period
Sept. 10 Consumer Credit Jul $2.0 $4.2B -$1.6B
Sept. 12 Current Account Q2 -$110.3B N/A -$109.6B
Sept. 14 Retail Sales Aug 0.7% 0.3% UNCH
Sept. 14 Retail Sales Aug 0.5% 0.3% 0.2%
Ex-Auto
Sept. 14 PPI Aug 0.1% 0.1% -0.9%
Sept. 14 PPI Aug 0.1% 0.1% 0.2%
Ex-Food & Energy
Sept. 14 Industrial Prod. Aug -0.1% -0.2% -0.1%
Sept. 14 Capacity Util. Aug 76.5% 76.7% 77.0%
Sept. 14 Michign Sentiment Sep 91.0% 92.0% 91.5%
Pre
Economy: Dragged Down by Global Economic Slump
• Economic problems around the world will limit the current U.S. economic recovery. Economies around the world are inked together through trade and investments. The U.S. economic slowdown hurts our trading partners’ exports to the U.S., limiting their ability to buy from us.. nfortunately, Europe and Japan have not done enough to spur economic growth. In Europe, the European Central Bank has cut the interest rate only twice. Also, swelling budget deficits and the “stability pact” have prevented European overnments from fiscal stimulus. In Japan, the government plans to chop deficit spending, and the Bank of Japan has been timid in halting deflation. The global economic slowdown is gaining momentum (Charts 1-3).
• In the U.S., investment-led slowdowns tend to be deeper nd longer; monetary policy has not been very effective in reducing excess capacity. The weaker dollar is another roblem for the global economy. Europe and Japan need weaker currencies to boost exports. With zero interest rates, the Bank of Japan can help the economy by depreciating the yen through monetary expansion. Europe, which is heavily dependent on trade, could slip into a recession. A stronger euro will hurt its growth prospects. Once again, the U.S. will become the locomotive powering the rest of the world, but the speed will be slow.
Bonds: Investing in Tax-exempts, Pros and Cons
• So far this year, tax-exempts have outperformed reasuries. Investors have moved funds from the turbulent and disappointing equity markets to munis. As the Federal Reserve cut the interest rate, steepening and lowering the Treasury yield curve, more investors flocked to this market in search of higher returns. In the process, the ratio of muni-to-Treasury yields has trended down (Charts 4-6).
• However, there are clouds on the horizon for munis. The Bush tax cut has shaved the marginal tax rate, making tax exemption less valuable. If the economy and earnings improve, funds will shift back to stocks. New issues will be 50 to 70 percent higher than a year ago. Pre-refunding as become popular to take advantage of low interest rates. The economic slowdown has hurt finances of state and local governments, forcing them to float more bonds than anticipated. This fall, California will raise over $10 billion, possibly the largest tax-exempt issue ever. Credit quality will become a more important concern as governments face a deteriorating revenue picture. Revenue bonds with dedicated income streams are preferable to General Obligation Issues, which depend on uncertain tax collections.
Stocks: Irrational Pessimism?
• Stocks have become a lagging, not a leading, economic indicator. Shell-shocked investors want to see tangible evidence of a sustained economic recovery and profit growth. The fall in the value of the dollar and economic turbulence overseas have scared away potential investors. The economy will be on solid footing later this year and earnings will grow again beginning early in 2002; then equities should show sustained rebound.
• Not all the news is dismal, though. Investors have not thrown in the towel. After all, the price-earnings ratio for the S&P 500 has been hovering near 30, a historically high number. Small and mid-caps funds have outperformed large caps. Value funds have done better than growth funds. Some small cap value funds have risen in excess of 30 percent this year. In terms of ectors, consumer cyclicals, basic materials, capital goods, financial services, health care, etc., have all shown good relative performance.
(Chart 1) The global economic slump will limit U.S. economic growth.
World economic growth below 2.5 percent is considered to be a recession.
WORLD ECONOMIC GROWTH
Year/Year % Change
1999 2000 2001(F) 2002(F)
Canada ----------------------------- 4.4 2.0 1.9 2.5
Japan ------------------------------ 1.5 -0.7 -0.5 1.5
Mexico ---------------------- ------ 6.9 2.2 3.0 4.0
China ----------------------------- 8.0 7.7 7.2 8.0
Germany --------------------------- 3.1 1.0 1.5 2.0
United Kingdom -------------------- 3.1 1.8 2.1 2.3
Taiwan ------------- -------------- 6.0 1.4 3.2 4.6
Korea ------------------------------ 9.0 3.1 3.7 4.8
Global GPD index ------------------- 4.8 2.0 2.3 3.6
(Chart 2) The U.S. is no longer the locomotive it used to be.
Japan is in recession.
Asian tigers have turned into mice.
Europe is about to slip into recession.
Mexico is in a recession and the rest of Latin America could be in a recession as well.<<< |
