Get Out Of The Bunker: Economy Set To Improve This Year

Includes: DIA, QQQ, SPY
by: Financial Sense

By James Puplava

The economic picture of the U.S. was recently clouded by extreme weather not seen, in some cases, since records started being kept. Some have scrubbed away the ice from their crystal balls and predicted a permanent cooling, however, even as the sun starts to rise and temperatures warm over much of the country.

Not so.

We cite a large number of factors that indicate the economy will likely improve this year:

  • U.S. loan growth is starting to pick up
  • Consumer confidence is steadily improving
  • Housing no longer subtracting from economic growth
  • Still no evidence of a recession on the horizon
  • Credit markets are healthy
  • Every state in the country expected to grow over the next six months
  • Philly Fed PMI rose substantially (significant leading economic indicator)

Even then, let's say the economy does improve. Does that mean it's off to the races?

Not quite. We think that even as the economic picture gets better, the markets will still be volatile this year.

One measure in particular that many are looking at is the four-year election cycle, which predicts a peak in the market between now and the end of April, weakness into the summer, and a rebound toward the end of the year. Chris Puplava recently highlighted this in his article, "Likelihood of First Market Correction in Two Years Developing," with a composite of how the market has behaved during previous four-year election cycles:

So, what could go wrong and knock the economy off track sooner than expected?

Although commodity prices are generally lower, we are starting to see a rise in labor wages for certain areas of the market, which could serve as an inflationary trigger. Also, two other trouble spots putting pressure on consumers are rent and healthcare costs. If inflationary pressures start to build, this will encourage the Fed to tighten back more aggressively and eventually raise rates, which, as mentioned previously (see story), is when investors need to start worrying.

Another worry right now is with China. If China's economic numbers continue to show contraction, this could offset economic gains here in the U.S. and elsewhere (see recent discussion with Jim Bianco).

Given an improving economy and the potential worries outlined, how would you invest?

As we have been recommending for many years now, we advise investors to stick with dividend-paying stocks with good yields, with a current focus on technology, financials, industrials and some of the overseas large-cap stocks that may play catch-up with the U.S.