Two Steps Forward, One Step Back?

Be careful what you wish for.

For years economists have been hoping that capital spending will pick up. They look at business spending on new equipment as an indicator that the economy’s animal spirits are getting back to normal. And companies are flush with cash these days, but they’ve afraid they’ll need that money for a rainy day. The Financial Crisis caused a lot of managers realize how dependent on credit they really are.

The expectation is that once investment in the economy picks up, hiring will have to increase. Someone has to build all those new plants, equipment, and software. Business investment will also lead to increased productivity, lifting wages for everyone and getting the economy out of the doghouse. Analysts have been hoping this will spark a virtual cycle: more hiring, higher incomes, economic growth, more hiring.

Since 2010 business investment has been rising as a share of the economy, but it’s still at a low level.

Source: St. Louis Fed

A recent survey indicates that many firms plan to increase their expenditures, but increasing spending will cut into profits. Profit margins have been soaring—leading to record stock prices and extended valuations. If investment picks up, the economy will grow faster, but the market could be vulnerable. Add in higher interest rates from the Federal Reserve and we could see a pullback from these levels.

Nothing is certain. The economy needs more investment spending to get out of its funk, but that spending has to come from somewhere. If there’s a pullback in profits, watch out.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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By |2017-07-17T12:34:15+00:00September 4th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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