No problem even with the manufacturing slowdown! What are the strengths and decisive weaknesses of the American economy?
The factors behind the fall in stock prices and the subsequent recovery can be understood by looking at the US economic structure
The Nikkei Stock Average fell sharply this week on the 3rd (Thursday).The decline was about 500 yenwhich is a rather large one-day drop.
The decline was driven by the US manufacturing index falling short of expectations.An index below 50 is considered weak, and it recorded its lowest at 47.8 this year. This is lower than during the China Shock of 2015–2016.
As the graph shows,the US manufacturing index has clearly deteriorated over the past year. The recession is approaching quickly.
Nevertheless, the Dow Jones Industrial Average rebounded after the drop.
The reason lies in the structure of the US economy.The share of manufacturing in GDP is only 11%. This has fallen significantly from 25% in 1970 and 16% in 1990. Much of US manufacturing has moved overseas, especially to China.
Meanwhile,personal consumption accounts for about 70% of GDP. Americans generally do not save much and consume heavily using credit cards, which supports the economy. Population growth from immigration and the children born to immigrants expands the economy, so Americans can keep buying without worry.
That is why manufacturing declines and the like are of little concern.As long as people keep using credit cards vigorously, the US momentum will know no bounds.
What is the fragility of the US economy? The “event” that could trigger the next crash
However, there are fragile points in the US economy as well.
They hold a large portion of assets in stocks, investment trusts, and real estate, so they are highly sensitive to these fluctuations. In other words, when stock prices fall, they tighten their belts, which further weakens the economy and drives stock prices down in a vicious circle.
In short,the US economy is very vulnerable to a “shock” that says, “This might be the end”. In the past, events like the Lehman Brothers collapse, the IT bubble burst, 9/11, and the China Shock have caused sharp reactions in the economy and stock prices.
Therefore, the next time stocks fall sharply is assumed to be when a triggering “event” occursthat could serve as the shock. If I were to give concrete examples, they might include the following.
- Resignation (removal) of President Trump
- Collapse of housing prices in China
- Bankruptcy or poor performance of large companies
Of course, the impact would be greatest when something unforeseen happens, so the event could arise from a completely different source.
Alreadyan inverted yield curveanddeterioration of the Chinese economy, among other negative factors have appeared. The market is not blindly optimistic; rather, it seems to be cautious about investments. It looks as if the groundwork for a market crash has already been laid.
When America sneezes, Japan catches a cold
We must not treat this as someone else’s problem of “America.”
When the US sneezes, Japan does not just catch a cold; it could lead to pneumonia. Below is the per-share profit trend for Japan, the US, and Europe.
Two points can be seen from this.
- Japanese companies are clearly increasing their profit levels
- Japanese corporate profits are highly sensitive to the economy
Regarding point 1, improvements in corporate governance and a shareholder-focused approach have raised profitability and boosted shareholder returns. As a result, despite GDP barely growing, the attractiveness of the stock market has increased.In the past decade, Japanese stocks have posted the second-highest gains after the US.
However, taking this snapshot alone could be misleading. As point 2 shows,the profits of Japanese companies, especially large ones, are extremely sensitive to the business cycle. After the Lehman Shock, many companies posted losses. Western companies did not experience such severe outcomes.
One reason is that many large Japanese firms are in sensitive sectors to the business cycle. Specifically, automobiles, electronics, machinery, and chemicals.
In other words,profits that have been steadily increasing up to now could fall sharply again if the economy worsens.
Therefore, in selecting stocks today, I try toavoid cyclical (economy-sensitive) stocks as much as possible. Whether a company falls into this category can be judged by whether it posted losses during Lehman.
Of course, when many people avoid such stocks, they can become undervalued and present investment opportunities. If long-term growth is expected, one might invest despite short-term downside risks.This balance is the essence of long-term investing.
