Daily Gains Letter

Forget the Debt Ceiling and Government Shutdown; This Is the Issue Investors Should Focus On

By for Daily Gains Letter |

Investors Should Focus OnThe odds of a slowdown in the U.S. economy are stacking higher each day. Investors need to be very cautious and tread the waters carefully, as a slowdown in the U.S. economy will mean more misery to come—and what we see now may become worse.

In the midst of the U.S. government shutdown and the approaching debt ceiling issue, a lot has changed in the background. The major financial news channels are fixated on issues where past occurrences were eventually resolved. We have seen politicians come to a decision about the debt ceiling before, most recently in 2011, and this isn’t the first U.S. government shutdown; the government was able to come to a consensus before, and this time will be no different.

Moving away from all the current noise, when I look at the numbers, I see a rough road ahead for the U.S. economy.

Yes, I understand that we saw the U.S. economy increase at an annual rate of 2.5% in the second quarter of this year, but I have to ask if the third or fourth quarter is going to be the same.

In its September projections, the Federal Reserve expected the U.S. economy to grow between two percent and 2.3%. These predictions were revised lower from the previous projections in June, when it anticipated the U.S. economy would grow by 2.3% to 2.6%. Note that the lower bound projections in June have become the upper bound. (Source: “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents, September 2013,” Federal Reserve web site, September 18, 2013.)

We also see companies in the U.S. economy showing signs of stress. According to FactSet, 89 of the S&P 500 companies have issued a negative outlook about their corporate earnings in the third quarter; this is the highest amount to do so since the research firm started tracking companies’ earnings outlooks in 2006. (Source: “Record high number and percentage of S&P 500 companies issuing negative EPS guidance for Q3,” FactSet web site, October 1, 2013.)

At the same time, there are signs that consumer spending in the U.S. economy may not be as robust as many think. The unemployment rate remains staggeringly high and the jobs being created are in the low-wage-paying sectors; this may cause consumers in the U.S. economy to stay away from the malls.

The National Retail Federation expects this year’s Halloween shoppers to spend about $75.03, compared to $79.82 in the previous year, or six percent less. The number of individuals taking part in Halloween shopping is also expected to decrease from last year’s 170 million to 158 million. (Source: “Ghouls And Ghosts Galore, 158 Million People To Celebrate Halloween This Year, According To NRF,” National Retail Federation web site, September 23, 2013.)

The effects of all this could be vast. If the U.S. economy does head for a slowdown, then expect the demand to decline further. As a result, companies will be selling less and earning less profit. The stock market may not keep the same pace as it has been, so be very careful.

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