STOCK MARKET NEWS - ECONOMY, INTEREST RATES, ITALY
Channel: Value Investing with Sven Carlin, Ph.D.
Date: 14/05/2018

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Do you hear the economic warning bells? Economic collapse ahead? Stock market crash or not?

A quick investment perspective on economic news will give us insight into what to do with our portfolio, what is the best risk reward portfolio allocation at this point in time and what can one expect to happen. I’ll look at U.S. economic data, emerging market yields and touch on Italy that is becoming a bigger and bigger risk.
Economic data – strong but also weak
The headline consumer price index came in at 2.5% which is good but might lead to higher interest rates which is a dance that has to stop at some point. 
Higher oil prices lead the impact on prices but those take time to really affect the economy which is something that could happen over the next year or two if oil prices persistently remain above $70. 
However, the market expected even higher inflation which then sent bond yields lower and stocks higher. Perhaps lower inflation is a sign of an economy slowing down. Wish it or not higher interest heavily impact sales of goods like new vehicles where a lot of debt is used and we see already that new vehicle prices have been declining. This means that automotive companies are lowering prices in order to get rid of the inventory.
Credit card debt has stopped climbing and for the first time in 5 years we see it slightly decline due to higher interest rates.
Higher interest rates will also impact companies and their profits. Few think about the refinancing companies to do in the next few years and what will be the impact on earnings.
This pile of debt is fine a long as the economy is expanding and there is confidence but we all know the pile of risk this is creating as there will be a rush to liquidity at some point. The thing to keep in mind is that the risks are piling.
Fortunately, all other metrics are still strong and unemployment indicators are extremely strong with the unemployment rate down to 3.9%.
However, the yield curve is getting flatter and flatter which is a signal that the party might be coming to an end as it is impossible to constantly grow because it simply isn’t natural.