I wish you all a Happy, Healthy and Prosperous New Year
The U.S. Economy has shown improvement in the past few months and the stock market closed higher for the year. There has been improvement in the housing market and the unemployment numbers have moved lower. Most U.S. corporations are in excellent financial shape and their profit margins have risen near all time highs. Despite the seeming better outlook, I am still cautious and I am keeping the portfolio investments conservative. The stock market returns do not reflect the real economy.
Although it is not wise to keep large cash positions because you would be effectively getting negative returns (considering inflation), it is equally unwise to be all invested when you consider the unsettling concerns in the economic outlook.
There are just too many things that keep me awake at night.
To begin, the GDP (Gross Domestic Product) the best measure of economic growth has come in under forecast for the past 3 years, and the outlook for 2013 before the “Fiscal Cliff” is only 2.2%. The average GDP for the past 30 years is 3.3%. There is not much growth.
GDP forecast GDP actual
2010 4% 3.0%
2011 2.8% 1.7%
2012 2.4% >2% 4th quarter not reported yet
2013 2.2% ?
According to Government statistics the unemployment rate has declined from 10% in 2010 to 7.8% today. If you calculate the people who gave up looking for work (Employment Participation Rate) that rate is still at 10%. Most of the jobs created have been lower paying or part time jobs. There is not enough growth to bring down unemployment.
Despite the political drama about the “Fiscal Cliff,” Washington has not addressed the expanding deficit problem. If you spend more money than you bring in eventually you will go broke. On average, individuals receive more than $100,000 in excess entitlements than they pay in. That is unsustainable and our debt keeps growing.
Interests rates are at historic lows, (0.25% for a 2-year treasury) and the economy isn’t growing very much, so what will happen if there is another recession. How much lower can rates go? What other tools does the Federal Reserve have? What happens to government interest expense when rates get back to normal yields? The long-term average is over 6%.
Although Europe is not in the headlines each day, Europe still has higher unemployment than the U.S. along with civil unrest. Europe is in a recession. What bothers me is that the fund to bail out the European Union has to be partly contributed by the very counties that need to be bailed out. How is that going to work?
There is a lack of confidence in Wall Street and Washington. “High Frequency Trading” (electronic trading using algorithm to make fast profits at the expense of investors) and the “Shadow Banking System” (the unregulated bank trading that is much larger than the regulated banks with potential financial risk) along with unknown coming regulations all make individuals less confident in the economy. Incomes have dropped over 8% in the last 5 years, and we need confidence to get the economy growing.
You need to be invested to make any return in this market (bank interest rates average less than 0.5%) but staying conservative until you can see some stabilization in this very unusual world economy is still the prudent investment plan. Market returns have mostly been driven by the excess liquidity (printing money) created by the Federal Reserve.
The U.S. economy has never experienced conditions similar to today. I think you have to be realistic to prepare for possible problems that we may see going forward, but not be scared out of making intelligent investment decisions because of market volatility.
As always please contact me to discuss your individual concerns.
DISCLAIMER
The views and opinions expressed herein do not necessarily represent the views and opinions of SCF Investment Advisors, Inc. or any SCF-related entity.
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