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MAKING CENTS OUT OF THE NEWS
Blog #05
(February 2nd, 2012)
It’s the Economy, and We’re Leery, Not Stupid
By Tom McAllister, CFP®
The 2.8% annualized growth rate during the last quarter of 2011, more than two and a half years into a recovery, is deeply disappointing. There is much talk about bringing down the 8.5%+ unemployment figure, but that alone is not the answer. Unemployment has been coming down in recent months. Unfortunately that is due, not to any rapid growth in our economy, but instead is the result of increasing numbers of the unemployed abandoning their job search. In fact, the economic outlook for the rest of the year remains rather dim.
Ironically, corporate profits remain strong. This is partially the result of record low interest rates. What corporate expansion is happening is financed by the record high cash balances companies have been accumulating. Large publicly held companies are, for the most part, not helping bring down unemployment; as a group. In fact, they continue to slim down their workforces. What employment growth we do have comes from the private sector.
Historically, the private sector has been the driving force in expanding employment. Today is no different in that private employers are cautiously doing their part. The problem is these very business owners are being attacked as a class by the president and his reelection efforts. Having worked primarily with self employed clients for nearly fifty years, I can assure my readers that, as a group, right now they are not at all inclined to aggressively start new businesses nor expand those in operation. These fine folks are naturally inclined to hold back on expansion plans pending some sort of assurance they are not going to have the earnings they might get from new endeavors taxed away by Congress and a liberal administration.
The world economy remains mixed, with China and the rest of Asia still growing, albeit at single digit rates. Weaker Euro nations such as Italy, Spain and Portugal may already be joining Greece in recession. It remains to be seen if the “PIIGS” will drag the rest of Western Europe into a mild recession. I do not expect that to spread to the United States. Our economy, thankfully, has few excesses, other than a rapidly expanding federal deficit and debt.
All these factors at home and abroad have been, I believe, factored into current stock prices, which are still low when considered in the context of history. January was indeed a good month for stock prices, with the popular averages up 4-5%. (At McAllister Financial, our managed account exceeded this by 2-4%, so we are happy campers!) While the market could well take a breathing spell in the next few weeks, we remain convinced there is at least another 10% to be had in 2012.
One month ago U.S. stocks were trading at their cheapest levels since 1990, based on historic measurements of price to earnings, price to book value ratios, and dividend yields. The market remains well below average based on these criteria after the January rally. The U.S. economic outlook for the rest of 2012 remains stable to positive. So, while there is no denying the economic recovery has been weak, the manufacturing sector is strong and retail sales are improving.
When it comes to employment numbers and the current administration’s policies, it makes sense to be leery, but the economic and market outlooks are stronger than the public perceives. The popular adage, “It’s the economy, stupid!” should not, I believe, be construed to scare investors away from the stock market. What might prove “stupid” is investor impatience and avoidance of the rewards to be had in the market during 2012.
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