Long term US prospects may sustain bull run
The dichotomy of the time horizon in the US markets is becoming more pronounced.
In the long term, we believe the US will continue to be in a position of strength and will get back to its historic growth trajectory once its levels of debt normalise. In the shorter term, things will continue to be tough. The second quarter earnings season has started badly before it has even begun, with negative pre-announcements outnumbering the positive ones by a ratio of three to one. The problems seem to be coming from Europe and China, while the US is not growing fast enough to offset it.
Just a couple of weeks ago forecasters were looking at earnings growing an average of 5 per cent among S&P 500 companies. Today they are expecting flat earnings. It would not be a surprise to see falling earnings by the time all the companies have reported. Europe will likely be weak for some time and China will probably not reach the pace of growth it has experienced for the last several years. The US too is not in great shape in the short term. The ISM manufacturing index, which is traditionally a good lead indicator of the economy, dropped below 50 for the first time since July 2009. More concerning was the new orders component, which went from 60.1 to 47.8. Any number less than 50 indicates a contraction in activity. More anecdotal data also points to an economic slowdown, such as the demand for diesel fuel, which has dropped in the past month.
In addition, the demand for chemicals has diverged from industrial production, which also implies a slowdown. On top of this we have the potential fiscal cliff and political uncertainty that will only increase as we get closer to the election in November.
In a few years the picture for the US could look very different. Energy could be cheap because of the huge finds of natural gas and the number of utilities that will have switched to using natural gas power plants, which could give the US a huge advantage over the competition in manufacturing. This year, for the first time in 35 years, manufacturing sectors have grown faster than non-manufacturing.
Many companies who had outsourced to emerging markets have said that they are thinking of bringing back some part of their manufacturing to the US.
One company who had been in China since 1999 said it had seen wage increases of 10 per cent every year and the employment ratio was three to one because the US was more automated.
Companies are trying to hold less inventory, so having a supplier in the US means that the lead times are shorter because the product does not have to be shipped. If amendments have to be made, it is easier to do so if the manufacturer is local. It is also apparently more expensive to rent a flat in Beijing than in New York.