On Wednesday, Alan Greenspan, a former Fed chairman, told CNBC, “Overall, the economy seems to be sagging.” On August 18, President Trump tweeted that the US economy is in great shape. The unemployment rate is near a decade low, which supports the economy. In the tweet, President Trump added that the growth rate will accelerate after the trade deal. Last month, the yield curve inversion increased the recession fears.
Greenspan said for a longer-term view, the rising aging population is reducing gross domestic savings from the economy dollar for dollar. The reduction impacts capital investment in the economy that’s financed by domestic savings. US personal savings, as a percentage of disposable personal income, has fallen below 8% in July from over 17% in 1975.
Greenspan said, “The problem at this stage is that it’s not clear where the markets are going.” He also said, “a 10% rise in the S&P 500 Index has a 1% effect on overall GDP. That is not a small number”
Market might drag the economy
According to Greenspan, any major adjustments in the stock market will impact the economy with a short lag. Last month, the US equity market had the second-worst month in 2019. With a possible peaceful solution to the Hong Kong crisis and the US-China trade talks back on track, the S&P 500 Index (SPY) will likely rise in September.
However, based on recent events, we can’t rule out the possibility of another escalation in the trade war. Brexit concerns could intensify in the future. Businesses across the globe will be impacted if there isn’t a deal. In terms of political stability, Britain exiting the European Union could have serious implications in the future. In almost the last 100 years, two of the largest wars that the world has ever witnessed started on European soil.
Greenspan discussed negative interest rates
In the same interview, Greenspan said, “You’re seeing it pretty much throughout the world. It’s only a matter of time before it’s more in the United States.” In this context, he was referring to negative interest rates across the globe. More than $16 trillion bonds around the globe have a negative yield. In recent tweets, President Trump said that the Fed should reduce interest rates.
In another interview to CNBC on Thursday, Société Générale‘s Philippe Heim said, “As a continuation of this dovish monetary policy … mechanically, this will put pressure above the net interest margin, above of the profits that we make from deposits.” Interest rates impact financial stocks’ profitability. Heim expects interest rates to stay low long term across the globe.
The trend in interest rates could have a delayed impact on the bank’s net interest margin. After the Fed moved to ZIRP from late 2008 until 2015, among sector-specific SPDR ETFs, the Financial Select Sector SPDR Fund (XLF) rose 88.2%. Since late 2015 when the Fed started to increase interest rates until July 31, XLF has risen 46%.
For the September 18 meeting, CME’s FedWatch tool suggests a 95% chance of a quarter percent reduction in the interest rates. However, there’s a 5% chance that the Fed will surprise with a 50 basis point reduction in the interest rates. At the current pace, in the next seven FOMC meetings, the interest rate might move back near zero like it was before December 2015. According to Greenspan, the falling yield implies an aging population. A shrinking working-age population could be a fundamental source for negative interest rates.
Stocks to consider
In a low-interest-rate environment, the utility sector might be a good choice. The utility sector offers regular income in the form of steady dividends. The Utilities Select Sector SPDR Fund has a nearly 3% dividend yield. Technology stocks might be a better choice. So far, the Nasdaq 100 (QQQ) has outperformed the S&P 500 Index by four percentage points this year. Recently, Goldman Sachs said that Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL) might be a better pick amid economic uncertainty. Microsoft and Apple also offer a dividend yield of 1.3% and 1.5%, respectively.
Greenspan’s view on gold
Greenspan thinks that gold prices above $1,500 per ounce suggest that people are looking for investments with value for at least the next 30 years. As we discussed earlier, if the US enters the negative interest rates club in the future, gold might be a good investment now. President Trump’s trade war has helped gold’s rise since 2018. In August, gold prices were active amid the equity meltdown. Experts think that with more quantitative easing in the US, gold prices could easily reach $2,000.