A couple of weeks ago we talked about all the reasons we’re bullish on the economy and the markets. This week we want to talk about our concerns, and one is shipping. The reason we look at shipping is because it’s known as the arterial system of our economy and could be a leading indicator. There are two indicators that we are looking into as far as our concerns go. The first one is a truckload diffusion indicator which fell to its weakest level in 2 ½ years. It fell 29% year-over-year which is a big fall in only one year. A CEO of a large trucking firm in Florida said the shipping is the quietest that it’s been for 20 years. The second indicator that we are keeping an eye on is the case freight index which is used by a lot of analysts as a leading economic indicator. The case freight index fell for the 5th straight month. We’re starting to see trucking indicators go from a potential slowdown to an actual contraction. This is something we looked at 18 months to a year ago and at that point in time, it showed strength. The number of open orders verse the number of available trucks was at record highs then. The economy was really humming along. That was a good indicator for us to assume that the GDP would surprise us on the upside, and it did. We even talked then about the fact there was a shortage of truckers. For every truck that was out there that was around 12 to 15 orders waiting to be shipped. We’re now seeing the reversal of that. People are placing orders 90 to 120 days in advance so that the products can be delivered in time before they’re needed. Data like is why the G20 Summit this week may have a heightened interest. This summit will be between the largest developed economies in the world where all the leaders meet to discuss ways to work together. When there is no global coordination on economic issues things like shipping and trucking comes to a halt. We’ll see what comes of this meeting and hope that it can turn this around. If the talks between the leaders of China and the U.S. go well, we could see shipping and trucking coming back up.
Will The Fed Cut Rates?
The Fed met last week and there’s been talk that they were looking to cut rates, but they didn’t. They did, however, indicate that they will cut rates again if the U.S. economy is slowing down. Why would rates need to be cut? Maybe the Fed was seeing data that is hard to find like the trucking and shipping indicators and caused them to want to pull rates back. The Fed could cut rates up to three times from where they are now to get back into a historic normal zone, so to speak. There’s a lot of room to cut if the U.S. economy does slow down but without indicators like this, it is hard to see.
There was a stress test done on the banks here recently. Last week our top 18 banks, where 70% of the capital to U.S. industry comes from, was found to be in extremely good shape. What we want to remind you of is that the Federal Reserve not only oversee rates like we talked about before, but, another big job they have is to keep the U.S. banking system safe. Since 2008, where there was not much cushion room, the banks have grown to the point, in terms of capital reserve, that they’re doing great. The reason that’s important to your money is if banks were in that good of a shape, they can take more risk with customers and can handle most, if not all, of the lending in the United States to companies that are small and where the employment rate growth is. If they can take more risk, they can keep the economy going. The stress test showed that currently, we could have double digit unemployment and a 50% drop in the stock market and the banks would still be fine. That alone is a great economic backstop that we did not have in 2008.
Rise of Technology
We’re seeing that Silicon Valley it’s alive and well. A magnitude of IPOs (Initial Public Offerings) have come out this year. In fact, one just came out that is a workplace messaging platform and it blew past valuations. So, if this economy is going to grow there’s proof that it can’t grow without advanced technology and we’re starting to see that become more and more true as these IPOs are continuing to come out. Companies going from the private market to the public market shows a lot of investor interest. We see risk in the economic growth from trucking and maybe some fear from the Federal Reserve that the economy may be slowing but on the positive side, banks can lend money and there’s plenty of appetite for risk in the market. So, there’s a lot of conflicting news on where the economy is headed. We think it shows that the economy, in fact, is not anywhere close to coming to a screeching halt. We’re more so starting to see that investors are hungry for reasonable and believable growth.
Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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