Since 11 September, the reaction of US consumers has been closely monitored, having been the main su...
Since 11 September, the reaction of US consumers has been closely monitored, having been the main support of the slowing American economy up until then.
The S&P 500 index is down 2.31% in dollar terms over the month to 9 October and unsurprisingly, the top-performing stock in the country happens to be one that specialises in products and services in the area of military and commercial electronics and missile and aircraft manufacturing.
Raytheon Company is up 45.07% over the month to 9 October and is followed by Northrop Gruman, up 31.50%, which provides products in defence and commercial electronics including non-nuclear shipbuilding.
Chris Tracey, global strategist at JP Morgan Fleming, says the economic significance of the terrorist attacks is that they occurred just as consumer confidence in the US was already starting to crumble in the face of a sharp rise in unemployment. Figures show unemployment had risen from 4.9% in August, up from 4.5% in July.
Tracey says: 'The attacks also happened just as some tentative signs emerged that manufacturing was beginning to bottom out. Indicators since the attacks confirm that consumer and business confidence have been significantly affected, with the result that the US economy will almost certainly report negative GDP growth for the third and fourth quarters. Given the interdependence of the global economy, there is a real chance that the world will be in recession over the fourth quarter.'
Still, even though the economic consensus has moved to a V-shaped recession, there is little agreement, Tracey says, on whether the recovery when it comes, will be V-shaped or not. This, he adds, will depend heavily on consumers.
Tracey adds: 'Private savings are much lower and borrowings much higher than they were a decade ago, raising the crucial question as to whether the US consumer will be sufficiently shaken by the economic fallout from events of 11 September to radically rebuild savings. If that is the case then we are in for a prolonged period of low growth.'
JP Morgan Fleming believes the very low valuation of equities relative to bonds suggests that holders of equities are very uncertain as to whether monetary easing policies will work and investors appear to not trust current valuations because they have absolutely no confidence in earnings estimates.
John Ross, portfolio strategist at Fidelity, says consumer spending is currently the most important source of growth in the US economy, accounting for around two-thirds of US economic activity. Up until now, despite the economic slowdown, US consumer spending had been very resilient, growing at an annual rate of just under 2.5% in the first half of 2001, fostered by the unprecedented eight cuts in interest rates by the US Federal Reserve this year alone. He adds: 'Following the attack, it seems only natural that a reduction in consumer confidence will make people less inclined to spend - at least in the short term. What is more difficult to predict is how long these consequences are likely to last.'
Defence spending increasing
Defence companies performing well
Rate cut will help boost growth
Little consensus on shape of recovery
Consumer confidence shaken
Unemployment on the rise
Joe McDonnell joins as head of portfolio solutions (EMEA)
Adviser of the Year - South East
Fidelity Multi Asset CIO's outlook
Willis Owen report
From 1 March