Editor’s note: Daniel Petrey is a native of Taft and received both his BS and MBA from
California State University, Bakersfield. He currently works as a
Financial Advisor at Mestmaker & Petrey Wealth Advisors, Inc. which he
co-founded and also operates as the CFO. His column will appear weekly in the Midway Driller and on taftmidwaydriller.com.
It doesn’t take an economic specialist to determine the U.S. economy is nowhere near running on all cylinders.
The big question is, has the economy started to turn positive or has it just stopped free falling?
One of the best indicators hinting that the economy is starting to turn positive is the stock market.
As a forward looking indicator the stock market attempts to gauge a company’s future profitability by approximately six months.
Of course, this is not an exact science and earnings estimates are repeatedly adjusted up or down.
Estimates are based on sales projections, profit margins, debt levels, and economic growth rates.
This is one reason why the market appears to move in fits and starts causing much trepidation for more conservative investors.
The stock market, as measured by the S&P 500 has rallied nicely off the March 2009 lows.
This could be nothing more than a rally in an ongoing bear market or the start of a new bull market brought about by a recovering economy.
Hindsight will tell us easily enough, but hindsight does not help you make appropriate investment decisions.
It would be next to impossible to have an economic recovery while unemployment is so high. However, unemployment is a lagging indicator as managers do not want to lay people off and wait as long as possible before doing so.
They are well aware that when they need to start hiring again it is more costly to train someone new and company’s are always attempting to avoid excessive turnover.
Since the U.S. economy is so reliant on consumer spending a lack of jobs is extremely destructive to our national growth.
Since economic data can be creatively debated so well by both political parties we have to look to companies earnings, as that is what drives the stock market higher or lower.
We have just started the current earnings season and so far actual earnings are beating estimates.
This could be a result of low expectations and there may be some truth to that. It could also very well be that cost cutting (layoffs) and productivity (more production per employee) are what is driving the better profits.
This cannot last forever. You can only cut so much and then consumer demand and production have to increase.
If this is indeed causing the positive earnings surprises, the market will again turn down until there is sufficient enough money in people’s pockets to spend.
The Federal Government’s intention to stimulate the economy by both fiscal and monetary means has been somewhat of a political train wreck.
Many analysts are concerned about our spending, national debt, devaluing the dollar, and hyperinflation.
Harsher critics would argue that the stimulus package focused on bailing out the banks just went for naught, and those dollars never found their way into the economy in the form of small business loans.
Others argue that we would be much worse off if nothing at all were done
.
Our Federal Reserve Chairman Bernanke cut his teeth studying the Great Depression and I am convinced he will take whatever steps necessary to prevent another severe depression. Will the cure be worse than the disease?
Will the “Green Shoots” many analysts are speaking about turn out to be nothing more than brown weeds?
