Best American Buys Part 2
In the week since we published the first part of this sector review, the markets haven’t calmed down much. As Global Income Edge’s chief investment strategist, Richard Stavros, pointed out then, we’ve seen the worst correction since 2011 over the past two weeks and the Dow is now down 8.5%. As much as I would like to, I certainly wouldn’t call a bottom yet.
Most of this turbulence is thanks to China, which having grown over the past two decades to become the second-largest economy in the world is crucial to global economic growth. Over the past decade alone, China was responsible for nearly a third of global growth. So Tuesday’s news that the country’s manufacturing sector contracted at the fastest pace in three years in August understandably jangled some nerves.
Thanks to the globalization of today’s economy, it has also been raising some questions about our own American growth prospects.
Just as I wouldn’t call a bottom to this correction just yet, I also wouldn’t say that this latest Chinese slowdown is enough to cause a U.S. recession. It’s not as if these Chinese problems just suddenly popped up, yet the U.S. economy still managed to grow by 3.7% in the second quarter. On top of that, exports account for only about 15% of American GDP and exports to the Asia-Pacific region are just 2%. Plus unemployment here is down, both business and residential investment is up, and consumer spending is strengthening.
So China problems don’t spell the end of the American economy. For now, your best bet is to buy American. Unfortunately though, even after this recent correction, our models aren’t showing any compelling buys in the American markets aside from what we have in our portfolios. Still, some interesting companies are popping up that we might add to our holdings if they become screaming values.
Financial Services and Banks
Financial services stocks are the most overvalued, with my review of the sector failing to turn up any bargains that I would feel comfortable recommending. The biggest issue with financial services companies is that they’ve been bid up on the expectation that the Fed would raise rates in September, a move that’s now in question.
For instance, insurance companies typically see their profitS rise along with interest rates, thanks to the higher returns they earn on invested premiums. Banks also get a boost from higher rates on loans.
The Fed has been fairly vocal about its desire to begin normalizing rates this year, and most traders have been betting on a September rise. But with all of the global turbulence, it looks like we might have to wait a bit longer for the first rate hike since June 2006.
That hasn’t really brought the sector’s valuations down to more reasonable levels yet, so at least for now the best bargains in the sector appear to be the ones we already recommend in our Aggressive Portfolio.
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