The stock market got off to its worst start ever in 2016.
The S&P 500 fell 8% over the first two weeks of the year as investors panicked over plunging oil prices and a slowdown in China. As the stock market has fallen, talk of a bear market and recession, defined as two straight quarters of negative growth, has grown.
Economists say there is an 18% chance that the U.S. will fall into recession, citing issues like falling oil prices, weakness in China and Europe, and a slowdown in the manufacturing sector. However, despite the stock sell-off and pockets of weakness, several indicators show that the U.S. economy is as strong as it's been in a long time, and many bellwether companies are thriving, indicating that talk of a recession is misguided. Let's take a look at three of them.
1. Starbucks looks stronger than ever
Starbucks Corporation (SBUX 0.65%) just posted its 24th consecutive quarter of global same-store sales growth of 5% or more. In the Americas, comparable sales were up 9% over the holiday quarter. More than maybe any other American company, the coffee brand stands for affordable luxury. It's an excellent indicator of discretionary spending. No one needs a $5 latte, and there are plenty of alternatives for a cheaper cup o' joe. But if you want to treat yourself and you have the means, there's a good chance you'll head to Starbucks.
This was far from the case during the last recession, when comparable sales dropped 8% or more for four straight quarters, taking a steeper spill than many of its restaurant peers.
Starbucks remains optimistic about the future. It plans to open 700 new stores in the Americas this year, the majority in the U.S., and it's launched programs like Mobile Order & Pay and improved its food selection to drive further sales.
In the overall industry, restaurant and bar sales were up 8.1% last year, indicating that American discretionary spending is growing fast. If a recession were coming, Starbucks would be one of the first companies to feel it. That hasn't been the case.
2. GM keeps on trucking
The phrase "What's good for General Motors (GM 1.98%) is good for America," may no longer carry the same weight as it once did, but GM is still a powerful force in the American economy. It has over 200,000 employees, and more than $150 billion in revenue. Based on those figures, the only American companies that are bigger are Wal-Mart and Berkshire Hathaway.
The company is in the midst of an unlikely renaissance following its bailout during the financial crisis. U.S. car sales set a record last year for the first time since 2000, at 17.5 million light vehicle sales worth $570 billion. GM led the way, moving just over 290,000 cars and trucks.
The automaker has not yet reported fourth-quarter earnings, but it appeared confident in its future prospects when it released guidance earlier this month. It raised its full-year EPS guidance to $5.25-$5.75 from a prior mark of $5.00-$5.50. In addition, the company increased its share buyback authorization from $5 billion to $9 billion, and hiked its quarterly dividend to $0.38, good for a dividend yield of over 5%. Those are all signs of a company and an industry in expansion.
Some have pointed to a decline in the seasonally adjusted annual rate of car sales since September, but that could be just noise, as the drop during the last recession was massive. Car sales fell by more than a third from 2007 to 2009.
3. Banks are in good shape
The financial sector was at the heart of the last recession as a real-estate bubble undid institutions that sat on worthless mortgages and had bet on ever-rising home prices.
Today, banks and consumers are standing on solid ground. American credit scores are much stronger than they were at the time of the recession. The average American now has a credit score of 695, up from 688 ten years ago. Credit scores have even improved within the last six months, and there's been a clear decline in the number of people with credit scores below 550 since the recession, a sign that fewer Americans are considered default risks.
Credit quality has also improved among banks, as default rates and foreclosures are falling. Bank of America (BAC 2.06%), perhaps as much a poster child as any for the financial crisis, has cleaned up its books and is generating stable profits. Its bad loans, or net charge-offs, were down to $4.4 billion last year. By comparison, that figure was $33.7 billion in 2009, nearly eight times higher. Its ratio of bad loans was 3.58% during the deepest year of the recession, whereas it's just 0.5% now. That's the difference between a banking crisis and a stable and growing bank.
It's important to remember that the economy and the stock market are separate, and a sell-off in stocks does not equate to an impending recession. As long as macro indicators like job growth are strong, and these companies are growing, the American economy should keep expanding.
