(Almost) End of the Year Commentary
Edwin L. Good, President
Good Wealth Management
November 17, 2011
A Happy Holiday Season to you and yours from all of us at Good Wealth Management.
We want you to relax and enjoy the holiday season. So that you don’t worry too much about your investments during your end-of-year celebrations with family and friends, we will share our observations and perspective on the markets which influence your portfolios.
We seek out the best analysis from the smartest people we know. We read, think, discuss, and make decisions about your investments on a constant and daily basis, so that you don’t have to. Nevertheless, feel free to call us with any questions or concerns.
Equity markets in recent months have been extremely volatile. At the end of the 3rd quarter the
SP500 index was down -8.7% for the year. Then during the next month the SP500 Index rebounded by 10.9%, the largest October rally since 1987, leaving this market index slightly positive for the year.
What is driving this unusual level of volatility? We think the market is being whipsawed by two major opposing economic forces.
Downward pressure is coming from the financial stress in Europe. If more of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) have to restructure (or default on) their debt, then this has the potential to create a worldwide financial crisis worse than 2008. So the market reacts in fear by selling off when the European news, especially from Greece and Italy, is grim.
On the other hand, economic measures in the US are showing some improvement. The number of jobless claims is trending down, 3rd quarter retail sales were up as was GDP growth at 2.5%, the LEI (Leading Economic Indicators) is pointing higher, manufacturing indicators are showing growth. Corporate profits remain strong. When this information comes out, markets respond positively.
So, how should investors weigh these contrasting issues and position their portfolios? At Good Wealth Management, we are guiding by the following assumptions:
- We are in a multi-year slow growth environment, what the folks at PIMCO have dubbed the “new normal.” Slow growth, low inflation, more frequent (if mild) recessions, and high structural unemployment. In our view this “new normal” is the painful adjustment we must undergo to reduce the level of debt created by the debt orgy of the mid ‘00s.
- US economic measures will likely be positive for the 4th quarter. Holiday sales may surprise on the upside. (It wouldn’t surprise us to hear reports in December of empty store shelves.) GDP will be positive for the quarter. Employment numbers may continue to improve slightly. Corporate earnings should remain robust.
- The European financial crisis is very serious. The Euro, as initially constructed and currently managed, is a flawed concept. You cannot manage a successful currency without a strong central fiscal authority. Unless the ECB (European Central Bank) violates previous agreements and prints unlimited Euros, or Germany puts its entire economy on the line to rescue the peripheral countries, there seems to be no solution. The Euro crisis has the potential to bring the world financial markets and economies to their knees. We are watching European developments very closely.
- A US economic slowdown may become more evident next year. Europe already may be in a recession. China, Brazil, and Hong Kong are slowing. The US economy will not be immune from global weakness. Talk in Washington of debt reduction and political wrangling in an election year, has the potential to unsettle the markets as well as contribute to a slower economy.
- The Fed will continue to be very accommodating. Their latest statement painted a pessimistic view of economic growth and left the door open to further easing. Could they print more money if things get worse? Probably yes.
These assumptions lead Good Wealth Management to remain mildly bullish on equities through year-end, although we are not aggressively invested. But we are less sanguine regarding market prospects for 2012. Our clients should expect to see (even) more conservative positioning going into next year.
We continue to regard tactical allocation and income-oriented strategies to be preferable to buying and holding aggressive equities.
As always, please call us if you have any questions.
Edwin L. Good, President
MBA, Chartered Financial Consultant
( The Standard & Poor’s 500 index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.)
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