Guest Commentary: How to look past the market volatility to find out what is happening
By Dan Perkins
I have been an independent money manager for over 40 years, and clients have told me, ” I can’t follow the markets, I don’t understand the volatility, do you have some simple keys that I can watch, that will give me an indication of what’s going on in our economy?”
I thought about that request for a long time, how can I boil down into simple keys that anybody can follow, and will give them a good indication of what’s going on in the markets, and the economy.
So, after careful consideration I have come up with the “One hand” approach to monitoring the markets.
You will see how, by following five indicators, you can quickly figure out for yourself the long-term direction the markets and the economy.
I will explain why each is important, and why I selected it. By looking at all of these together, the five indicators can help you understand the economy.
The first indicator is the price of crude oil, more specifically, the price of West Texas crude.
Crude drives our economy, the cost of gasoline, diesel fuel, jet fuel, plastics, pharmaceuticals, and on an on. The price of energy is like a tax increase that rises when the price of oil rises, or a tax cut when prices fall. Just look at what happened to the price of gasoline over the last 12 months, for as prices fell you had more and more money in your pocket to do something else.
You could buy a car, or bigger television, or bigger house.
You can afford more, because an important cost to you has declined. For every penny decline in the price of gasoline that is sustained for 12 months, adds $1.3 billion to the US economy.
The longer crude oil stays low, around $50 a barrel; the impact will grow in magnitude across the economy. Lower costs for imported energy will reduce the balance of payments, and will create deflation.
Energy is the most important indicator because of the significant impact on our economy, and our way of life.
The second indicator is interest rates, more specifically the yield on the 10-year Treasury Bond. The cost of borrowing also has a significant impact on corporations, individuals, and governments.
When interest rates are low we can borrow more money, so we as individuals can have a bigger house, corporations borrow money to a expand their business, which means they can hire more people and buy more plant and equipment.
Governments can finance their debt at a lower cost therefore creating less strain on the budgets and stability of the taxes we have to pay. Simply put, a higher cost of money makes it more difficult for individuals, corporations, and governments to operate efficiently. Short-term interest rates, the money we earn on money market funds or CDs at the bank, will affect our income.
For almost 8 years money markets and CDs have been paying minimal returns and are no longer the source of supplemental income for retirees.
These people have been forced to extend their maturity or look at alternative income producing investments that may increase their risk, in order to gain the income they need.
The third indicator is the price of gold. In times of global turmoil and accelerating inflation, gold has been a hedge to protect the value of your assets. Gold has dropped over $700 an ounce from its high.
The price of gold will give us an indicator of inflation and high levels of economic growth. At its current level of $1,200 an ounce it is not signaling any significant inflation on the horizon. By following the price of gold you can get an indication of the direction of inflation and economic growth on a global basis.
If you start to see the price of gold move higher, pay attention to the other indicators as the economy may be heating up.
The fourth indicator is the value of the US dollar against other major currencies. Currently the dollar is at five-year highs against all global currencies.
There are two reasons for this first the decline in energy prices and second growth in America outpacing the rest of the world. As the dollar strengthens more and more people will be switching out of the euro, the yen, and the pound to the US dollar.
A strong dollar benefits America in that imports will be cheaper, everything from clothes, cars, to oil. So, think about planning a trip to Europe, this maybe this summer to do it, as it is possible that the euro, by this summer, will be 1to1 versus the American dollar.
The last item is unemployment. Don’t look at the published unemployment rate because it’s not an accurate reflection of what’s going on in the economy.
Rather focus on the percentage of people employed out of the potential workforce. Currently that number is under 63%, the lowest in almost 40 years.
This statistic is important because it tells us the demand for labor. Currently out of every 10 people willing to work and capable of working only 6.3 have jobs.
If this number starts to rise more and more people are going back to work, which is a good thing, for the economy and for the unemployed. The longer it lingers at 63-percent or less, there will be little expansion and job creation.
If the number moves up then we can expect inflation to pick up, the price of gold’s will rise, and so will the price of energy. But as long as we stay at this level we won’t see much change.
The challenges after we’ve studied all these numbers, “What do I do with my money?”
Dan Perkins is a Sanibel resident and has a private wealth management practice Daniel M. Perkins, RIA, LLC. He has been managing money for over 40 year.
His articles should not be construed as investment advice. Always check with your broker or investment advisor for specific recommendations.