Market commentary: Trouble in the US? I don’t think so!

The decline in December retail sales by 0.9% reported by the US Commerce Department triggered a sizeable reaction from the market, which after giving it some thought, seems like an over-reaction in my opinion.

On the news, the US equity market sold off on the premise that the Federal Reserve will push back the date for when it will start raising interest rates, and will lengthen the period of dovishness. The bond market on the contrary rallied as investors bet that inflation will stay low for longer, commensurate to a low interest rate environment.

Logically the economics of the reaction make sense, however I feel that the reaction and subsequent talk of changed market expectations over the direction of the Fed from one negative economic figure is over-played and cannot be taken in isolation.

The current market sentiment also added to reaction, as the plunge in oil and other commodities, slowdowns in China and Europe and general feeling of uneasiness played its part.

When analysing the health of the US economy in totality over the 2014 period, the economy has made significant strides forward and is by far outperforming its developed nation peers. The resultant depreciation of the Euro and Sterling against the Dollar over the past year is testament to this outperformance. The reasons why I believe the US is still geared to be a winning horse in the near term are set out below.

U.S. consumers are not chronically ill; they have just taken a step back. Yes, last month’s decline was the biggest in a year. But consumer spending probably rose at a positive annual rate, declining in only two months of 2014.

The U.S. jobs market has been soaring in the past year. Investors were most recently cheering news of another big rise in U.S. payrolls amongst an economy that added about 3 million jobs last year, a significant show of strength.

The plunge in oil and other commodities is mostly good news for consumers. Cheaper oil means cheaper fuel and operating costs for industrial companies, which eventually should translate into cheaper goods and hence additional demand. Most economists are saying that cheaper oil is good for global growth, particularly the US being positively impacted as its economy is not oil reliant. Countries like Russia and Venezuela, whose economy is out of balance as a result of the oil plunge, are expected to contract in 2015.

Also, the nature of the oil plunge, being as a result of oversupply as opposed to failing demand, is not alarming for global growth. Figures of oil consumption have actually been on the rise, up to around 93 million bbl/day in December from around 90 million bbl/day in June; definitely not a signal of a slowing economy.

In conclusion, investors should expect an increased level of volatility in the current period as investors are edgy and take the slightest signal of weakness as an opportunity to take profits. Also, as investors take up increased defensive positions, additional volatility attributed to stop loss triggers may extenuate temporary downward movements; which could be attractive entry points.

This article was issued by Mr. Simon Psaila, Trader/Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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