This week: a few thoughts on the recent economic slowdown and stock market decline. Despite popular belief, economists do not just “guess” what is going to happen. They look at data and specifically economic indicators. Some indicators are leading which means they tell you in advance. These include the ISM manufacturing & service indices, initial unemployment claims, manufacturing factory utilization, housing starts, junk bond yields, etc. Other indicators are lagging. These are much less useful since they only tell you what happened after the fact. The best example of a lagging indicator is employment.
The leading indicators have been telling us that the economy is slowing and hence you have seen a bit of a selloff in the stock market. The surprising thing is that the selloff has been slow and orderly. The U.S. stock market is only down about 6-7 percent from the peak (April 29th).
This is a dangerous time to try to time the market. The 2 big issues right now are how the Greek debt crisis will be resolved as well as our own Debt Ceiling? If those issues turn out better than the market is predicting, you could see a quick rally. If they turn out worse, we are headed lower. At the end of the day, valuations are good and the patient investor will be rewarded.
Posted in Weekly Insight | Posted on 27-06-2011
This week I wanted to share an observation: Imagine the wide range of answers you would get if you asked the average American when the U.S. economy will return to the level of economic production we attained before the financial crisis. What most people fail to understand is that we are producing more goods and services than ever before in history, right now. So why does everyone feel that the economy is so bad? Probably because we are producing this peak level of economic activity with 7 million fewer workers than we did 3 years ago.
This is only possibly because of significant increases in worker productivity. In fact, in the past 2 years, business payroll has only increased 2 percent, while spending on equipment and software has increased by 26 percent. That is not good news if you are looking for a job. However, it may help some people understand why companies are so profitable, balance sheets are so strong, and the stock market has performed better than many people would have expected.
Productivity gains are what have enabled American’s to increase their per capita income and standard of living over the past 235 years. However, there are times when the gains in productivity outpace the creation of new jobs. Eventually, companies spend their cash pursuing new markets and the jobs follow. Let’s hope that happens sooner rather than later.
Posted in Weekly Insight | Posted on 20-06-2011
I thought this graphic which appeared in the Wall Street Journal a couple weeks ago was very interesting. Vegas has the distinction of having the largest boom and bust but you would be worse off if you bought a home in Detroit a decade ago. They didn’t have much of a boom in the early part of the decade but still had the bust.
The constant negative news (and stock market slide) over the past couple weeks has been concerning to investors. However, here’s the situation; The U.S. is doing better (economically) than Europe and Japan. Emerging markets (Brazil, India, China) are growing but have their own problems. For example, Brazil just raised their benchmark interest rate to 12.25 percent to combat inflation and China has a real estate bubble which seems like it is going to deflate, if not pop. Emerging markets have underperformed domestic & developed int’l stocks so far this year.
Predictably, many investors have been shifting into “safer” asset classes like bonds. However, bond prices are about the highest they have been in 30 years and will get killed as soon as there is any sign of inflation, rising interest rates, or stronger economic growth. Besides, stocks are pretty reasonably valued at 13-14 times next year’s projected earnings. The average over the past decade was 17x. If things get a bit cheaper, it’ll be time to buy stocks (not sell).
Also on a positive note, there are some encouraging trends: Americans have 140 million fewer credit cards than they did in 2007, the savings rate has grown from 1 percent to over 5, we got good trade deficit numbers last week and the U.S. is exporting 22 percent more food and 18 percent more industrial goods than we were a year ago.
Posted in Weekly Insight | Posted on 13-06-2011
Other than the raft of negative economic news over the past week, the other item weighing on the stock market was the budget impasse and the debt ceiling. The situation is that the U.S government cannot borrow more money unless it is approved by congress. Congress is not playing ball until there is a deal to (at least partially) close the budget deficit. Currently, the federal government spends approx 25 percent of GDP and tax receipts only add up to about 15 percent. The democrats generally believe that we need to raise taxes and cut spending, whereas republicans only want to cut spending and leave tax rates where they are. The debt ceiling has been raised 80 times before and most people believe a deal will be cut this time also. The question is, what if it isn’t? Naturally there is a lot of speculation about what would happen to interest rates and the value of the dollar. The likely scenario is that any government shut down would be short lived. However during the shut down here is a partial list of expected immediate impacts:
Posted in Weekly Insight | Posted on 06-06-2011
Click on the link below to view and/or print the 2011:
- Tax Brackets and Rates
- Standard and Personal Exemption Amounts
- IRA and Pension Plan Contribution Limits
- IRA Minimum Required Distribution Chart