The GDP numbers for the first quarter were just reported and they’re the lowest in three years.
President Trump may be in a bit of pickle here since he has already said his administration was to get the credit for the strong markets and the bullish sentiment indicators. It’s hard to say now that this tepid first quarter number is Obama’s fault.
But the political blame game is immaterial.
There are important political factors at play now, which I will get to later, but the fact is, the economy isn’t out of the woods yet.
I’ve been saying this — as some of you have pointed out more than once — like a broken record. I stopped the gloom and doom for the most part in February, as the markets continued to boom, regardless of my warnings.
And this will likely continue to happen now, too.
Not just blind optimism
But it can’t whistle past the graveyard too much longer. Q1 GDP came in at 0.7 percent. Economists were predicting 1 percent. If this was a stock that missed by that much it would be crushed.
But this is the unstoppable stock market. It continues to rise, regardless. Is that just unbridled American optimism at play? No.
This is Wall Street buying time to figure out how to save itself when this whole thing starts to turn over.
The Federal Reserve wants to sell almost all the assets it bought since the financial collapse and raise interest rates two more times this year.
That alone will surely bring on a recession.
More to worry about
But there are more factors at play here as well.
There’s significant saber-rattling with North Korea and that could mean serious trade issues with China and effect all of Asia. That is not helpful to the U.S. economy and any escalation would be a good excuse for a market selloff.
And this is to say nothing about potential terrorist or cyber-terrorist attacks on U.S. interest.
If the economy isn’t going gangbusters, then all the back-patting over earnings this quarter are already overdone because it’s hard to see how next quarter’s earnings are going to rise when the economy barely budged.
Washington also is getting mired in the usual “lots of talk but little action” when it comes to a domestic agenda. Healthcare is in limbo. A tax reform plan is more a dream than a reality. Infrastructure stimulus is not even on a burner at this point.
As I noted in a recent piece, market correlation — stocks moving in unison — had been stunningly high until the Fed rose rates. Now stocks are starting to become more volatile.
The retail sector in the U.S. is undergoing significant transformation with big and small retailers closing stores and laying off workers in a desperate attempt to remain solvent, forget profitable. And losing a middle management job at Sears doesn’t equate to a new warehouse support job at Amazon.
The energy sector is stable for now, but we’ll have to wait and see what happens once the air conditioners get turned on in the Middle East — that usually when Saudi Arabia starts pumping more oil to offset its domestic energy bill.
The good thing for U.S. producers is since the last drop in oil prices, most have restructured and are now able to be profitable at lower prices. That gives them more flexibility if the price of oil drops significantly from here. But that’s only if the global economy can keep demand growing. Otherwise we’ll see another bust before the boom gets traction.
Big Tech and Big Pharma are doing well but with healthcare legislation in purgatory, you have to take it quarter to quarter in these sectors. The same goes for the health insurers.
Of course, big banks and financials are doing well. And not just at home; they’re killing it all around the globe at this point. Most are doing far better than the countries where they do business.
But any shock will show that their success is a facade.
A good time for gold
To me, all this adds up to trouble.
And that trouble will not simply pass by the markets.
That is why I have talked about gold (and silver) as a hedge against these growing risks.
Physical gold or even ETFs that hold physical gold should be a part of your portfolio. Notice I said, “part” not “entirety.” Some sectors will manage to get by and will revive fairly quickly.
But it’s been a while since we’ve had a big correction and people tend to forget how ugly a significant correction can be. That’s why you need to prepare now.
Gold has had a decent run year to date, and even if the correction doesn’t happen next week, gold is still contributing to your profits.