Fox Business recently tapped our resident options expert Jared Levy to discuss earnings results and debate a recent research report on the future of the U.S. economy from Morgan Stanley.
The report's headline: "No Fed Rate Hike Until 2018." That's news enough, but as Jared dug deeper, he found some troubling signs relating to the American consumer as well...
Here's what Jared told readers of his premium newsletter, Pro Trader, about the report:
|"The Morgan Stanley report forecast 2017 U.S. GDP growth at only 1.5%, which is 35% lower than the consensus of 2.3%. The report detailed just how bad things are for American consumers and how many were skimping on expenditures and saving in record numbers.
Morgan Stanley explained that the Fed would be working overtime just to keep U.S. consumers afloat, and the firm's chief European economist, Elga Bartsch, believed that other competing economists were far too positive in their forecasts. Her somber prognosis didn't even include any bearish surprises (like a Greek crisis) or a more expedited rate hike schedule from the Fed."
Now here's what's even more interesting about the report: What started as a dark prediction for the future came with a recommendation to hold onto emerging market stocks and big, multinational American companies like Microsoft (Nasdaq: MSFT), IBM (NYSE: IBM) and others.
According to Jared, the message is clear: If interest rates stay low, big multinational companies (like those in the Dow Jones Industrial Average) can prosper despite weakness at the consumer level here in the United States.
American Consumers Are Feeling Nervous
For the past couple of years, U.S. markets have been the proverbial best house in a bad neighborhood. Europe, Britain, China and other nations have faced economic challenges (and still are). Central banks around the world have created stimulus measures and weakened currencies as a result. But the Fed, whether you like it or not, was among the first to act in the aftermath of the global financial crisis. And lately, it looked like its policy would be to stand firm and finally begin raising rates. But that could be changing.
According to the analysts that wrote the Morgan Stanley report, rates may not rise again until 2018. This is very good news for big companies that do lots of overseas business. (Nearly half of the S&P 500's earnings come from outside our borders.)
But smaller U.S. companies that do the bulk of their business within our borders will be the losers if this prediction comes to pass. That's because these companies desperately need American consumers to spend. Trouble is, they just aren't.
Consumer spending accounts for more than two thirds of GDP. Recent reports showed an improvement in consumer spending habits in May and June, but the future looks troubling. Consumer confidence has actually been trending lower since early 2015.
Meanwhile, household savings are up. Since the start of 2016, American households have been saving up to nearly 5.3% of personal income. That's up sharply from a low of just 1.9% in July of 2005. Higher savings rates, dwindling consumer confidence and flat income growth spell one thing: increasing fear among consumers.
The takeaway is this... Jared has already mentioned recently how poor retailers are performing when talking to his Pro Trader subscribers. And small-cap stocks are likely to be affected, too. There are some exceptions, sure, but make no mistake: Broadly speaking, these are not sectors you want to be in right now.
Instead, Jared and his readers plan to profit from this weakness. They recently made a trade to do just that -- allowing them to potentially make a quick 18% in 36 days. If you'd like to learn more about how Jared's strategy works, simply click here.