Summer Update

With mid-2011 upon us, now may be a good time to provide an update on key economic issues and the market outlook. So let’s review the “macro” view of things.

If you will remember, last August the Federal Reserve announced their next strategy (QE2) to help support and possibly kick-start our slow economy. The markets read the potential positives of QE2, at least to the stock markets, and we saw the “best” September in years. The markets continued to rally through the end of the year and the mood of the consumer was more positive.

After the first part of 2011 we started getting more positive indicators such as increased retail sales (a good Christmas and consumers spending a little more), some signs of job improvements (even reports of companies hiring), and consumer confidence increasing. However mortgage interest rates rose and the housing sector was still showing signs of no improvement. Additionally gasoline prices at the pump jumped almost $1 approaching $4/gallon. It’s believed all the new money “sloshing” around in the economy created by QE2 found its way into the stock, commodities, and energy markets creating a “playing ground” for short-term speculators.

Now we are in the first of June, and we are hearing the economy isn’t doing as good as we had thought. For instance, economic growth (GDP) in the first quarter was only 1.8% (much slower than what the economy should be emerging out of a recession). Next, the jobs picture deteriorated again in May. And then finally the housing sector is extremely weak with some new price declines in some of the major markets (Florida, California, etc.). Remember up to this point we have been trying to restart our economy without any help from the Housing Sector, which is a very important part of our economy (construction, building materials, appliances, home furnishings, etc.).

So with all this being said, expect some version of the following this summer:

1) More, intense political wrangling and blaming from both sides. With Congress and the White House pushing the deadline to August to raise our nation’s debt ceiling expect more blaming and whining from our “adolescents” in Washington. When the deadline finally comes more than likely the debt ceiling will be increased with some compromise on government spending (but less than we need).

2) Gasoline prices. With the economy starting to signal a soft-spot, Europe continuing to have problems, and the emerging economies (China, India, Brazil, etc.) trying to contain their growth to minimize their inflation, it’s possible you may see noticeable gasoline price declines at the pump. In fact that appears to be starting to happen even now.

3) Mortgage rates. Mortgage rates have dropped again about 0.75% and credit-worthy people can now find 4.5% on 30-year fixed mortgages and 4.0% on 15-year fixed mortgages. This can actually become a great time for people to buy a home or refinance.

4) Volatile markets. Since the Federal Reserve’s QE2 program the markets have been very stable with lower volatility. In other words we haven’t seen many days where the DJIA dropped greater than 200 points. As the Federal Reserve unwinds QE2 you may see more volatile swings in the stock markets. So don’t be surprised and try not to let that scare you.

How are the markets going to respond to all of this? Well, no one knows. Remember everyone thought this past September would be horrible and it was the best single-month September ever for the stock market. Also keep in mind after the major crash of 2008-2009 and in a very, unprecedented scary time in our economic history the DJIA has gained 92.0% (3/9/2009 – 5/31/2011, WSJ).

Now I could speculate and you will hear others who will tell you “exactly” what they believe the markets will do. Further, you can go out and buy all the books you want telling you what’s going to happen both now and later. In fact if you like “horror or fiction” there are plenty new books written about America’s doom days ahead. But understand that we’ll only know “for sure” after it’s happened!

Yes, your investment allocation needs to be correct and needs to be reviewed and adjusted periodically which we will continue to do for our clients. But please try to not let this stuff scare you or cause you to “derail” from a well thought out investment plan. And if you feel the need to “time” your investments (in and out of the market), then let me direct you back to our blog to an earlier post titled “A Crash Overhang”.

So in summary, go about your life and enjoy it. Try not to try to react to what you are going to hear (or even try to fix). And this summer may be a good time to avoid the Business and News TV channels as they hype all the negatives.

Market Update March 17th

We hope things are starting off well for you in the beginning of Spring. Due to all the recent events I thought it best to update you on what we are hearing.

The markets have given back a portion of the growth we have seen since the market bottom March 9th of 2009. According to the Wall Street Journal, remember the S&P 500 index has increased 85.8% from this low through last night (March 16). Keep in mind it’s typical for markets to consolidate and lose some ground when they gain so much in this type of time frame. Now with the recent Mid-east tensions and the Japan earthquake some market volatility has reappeared and uncertainty has risen.

On a conference call yesterday with Fidelity Investments we learned the following regarding Japan. First, the next couple days are critical as Japan struggles to get control of their nuclear reactors. Assuming the outcome improves and avoids a horrific outcome we could see the market rally fairly quickly.

Next, with Japan considered a Tier 1 supplier to global manufacturers in the auto, tech, and electronic businesses, supply interruptions are still unknown. As global manufacturers scramble to offset Japanese components we could see time delays to product production. It appears there are alternative suppliers stepping-up and offering supplies to offset most Japan delays.

As time goes by and Japan begins to rebuild this could prove stimulative to Japan’s economy as well as globally as they buy steel, wood, concrete, industrial equipment, etc. Keep in mind this can create more inflation as well as higher interest rates.

In terms of the oil situation, as of late, we have seen the oil markets calm down and give back some of their gains. It appears other OPEC countries are stepping up and offsetting the Libyan supply interruptions. The real question is can Saudi Arabia avoid the political unrest experienced in Egypt and Libya. We sure hope so. All of this heightens the need for an effective energy policy here in the U.S. Who knows, these recent events could force Congress and our Administration to deal with our long-term energy problems.

In the terms of the U.S. economy we have seen some improvement since the latter part of 2010. Unemployment has declined and both the consumer and businesses are beginning to spend money. And other than higher gas prices, consumer’s attitudes appear to be more positive. Also, we are hearing that small investors are slowly re-entering the equity markets.

In summary, it almost never benefits an investor to react to these types of events and short-term trade in this financial environment. Keep in mind, for mutual fund investors, money managers and their analysts have a plan and make the necessary changes as they “objectively” see the need. They have much more information than we can imagine. As of recent we have heard mutual fund managers use this type of short-term fear to buy good stocks and bonds that become very attractive due to the market volatility.

We hope this helps and we pray for our Japanese friends. The effect on Japan’s people is so much more important than any of our financial concerns.