I have had many people in my life who smile at me and remind me: “Patience is a virtue”.
I am not a patient person. No matter how hard I try, I just am not.
I don’t like to wait for others to make a decision or take action. I like to gather my information, assess the situation and then move on.
Still, I have to admit that there are times when a wait and see mentality is wise when it comes to both life … and investing.
And after the release of the latest Commerce Department economic figures, I can see that a number of traders are taking the wait-and-see approach to their portfolios.
But are they about to miss the next big rally?
The Commerce Department failed to provide investors with a reassuring snapshot of today’s economy. The gross domestic product (GDP) for the fourth quarter grew only 1.9%, without forecasting a growth of 2.2%.
While that number broadly matched the average annual growth rate of 2.1% since the recession ended in mid-2009, it remains the lowest average rate since 1949.
The so-called recovery from the Great Recession has been anything but impressive.
Digging into the numbers, we find that consumer spending – which accounts for about two-thirds of all economic activity – has slowed down a bit to 2.5% growth from the 3% growth in the third quarter.
Business investment started to pick up at the end of 2016, with companies focusing on equipment and intellectual property products such as software and research and development.
Of course, poor performance in the fourth quarter put a damper on GDP for all of 2016, as growth fell to 1.6%, down from 2.6% growth in 2015.
In fact, it was the weakest GDP growth since 2011.
Guilty of slowing down
Consumers struggled to keep the economy going in 2016 as they continue to do most of the economic activity in the United States.
But much of the weakness in 2016 came from the fact that companies cut spending throughout the year. Many companies have cut production in an effort to reduce excess inventory levels that had built up in 2016.
In addition, companies in the petroleum sector have sharply reduced their trade spending, with oil prices remaining below $ 50 per barrel for most of 2016. Drillers have reduced demand for their rigs and other equipment. because it was just too expensive to extract the crude from the earth.
As oil prices began to rebound and hold above $ 50, many companies increased demand for their rigs. But we still have a long way to go. Baker Hughes reported today that there were 1,057 active North American rigs, still a 43% drop from the 1,840 that were active at the end of 2014.
If oil prices continue to rise, we will see a rush of oil companies to the fields, putting workers and rigs back to work. This is a big plus for the economy.
But pushing up GDP again – and meeting President Trump’s commitment to a 4% growth rate – isn’t as simple as pushing up oil prices and moving away from the $ 50 mark. the barrel.
The new president has brought a lot of uncertainty to the market, leaving many companies hesitant to take big steps that would burn off the stock of liquidity they have accumulated.
Trump has tempted many companies with the promise of corporate tax cuts, reduced regulation, and increased infrastructure spending.
But will these pretty bonuses be quickly offset by the trade war he seems determined to continue? The promise of increased tariffs against China and Mexico – two of our three major trading partners – will most likely result in preferential tariffs against products made in the United States, which will hit multinational companies hard. And Trump could potentially extend tariffs to cover products imported from many other countries around the world.
So … American businesses win with lower taxes and regulations, but lose when their income goes down because fewer people in the world buy their products.
Many traders have decided to adopt a wait and see mentality, with their eyes riveted on our new president. If Trump can find a way to cut taxes without disrupting trade – and in turn, not disrupting the steady flow of income from foreign consumers – we could see business and consumer spending rebound, pushing back U.S. GDP. at 4%. And that will send the market well above the 20,000 level that the Dow Jones Industrial Average has just conquered.
But a trade war could prove massively damaging to this recovery and businesses caught in the middle.
For now, I remain in a market determined to hold on to its gains despite poor economic news, but I have an exit plan in place to protect the gains I have made.