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By Mat Johnson What a great year last quarter turned out to be. Last quarter's equity market returns would have made for an excellent annual gain. The S&P 500 rose more than 15%, while the technology-laden NASDAQ advanced more than 20%. For the S&P 500, the gain represents the best quarterly gain in more than 10-years. Of course, these impressive quarterly gains follow on the heels of market declines of historic proportions, and represent just a small gain relative to the market peak less than two years ago. More recently, the U.S. equity market has been shedding some of last quarter's advance, and in fact has been doing so since early June. The question has more recently become — did the stock market rise too quickly, too fast, and might it be headed lower given the latest round of weaker than expected economic data, namely continued job losses, and a further rise in unemployment. Recent economic data has certainly helped to reestablish concerns that the U.S. economy could be on the brink of a relapse, or at the very least that the stock market's recent ascent since early March may have been premature. On virtually all economic fronts, including consumer confidence, manufacturing and employment, recent data has been perceived as a disappointment. Clearly, the economy must be returning to the recessionary abyss. Right? There is no disputing that all of this disappointing data has been reported, and that it paints a less than upbeat portrait about the economy's current condition. However, even if the economy was recovering, what should the numbers being reported look like? Will all economic figures be unambiguously "better than expected?" In other words, what does an economic recovery look like in the monthly numbers? Perhaps surprisingly, an awful lot like the ones being released in recent weeks. While regular monthly updates received via economic releases are important, too great an emphasis seems to be placed on them, each and every month. This is quite the opposite of what occurs during normal economic times, and more importantly, during bull markets. Contrary to what seems to be popular opinion, recessions, expansions, bull and bear markets are not made or broken by the monthly reports on consumer attitudes, retail sales, employment or even quarterly GDP. For the great mass of market-watchers, the endgame of the economic reports is how they add up to quarterly GDP and whether this figure is positive, negative or above/below expectations. The true significance of the reports however, is not in the monthly math, but rather, whether the economy is "working," and where it stands in relation to contraction, recovery or expansion, or "worse, less worse and better." Ultimately, the economy is a market of processes, which results in greater or lesser economic activity being undertaken, jobs being added or removed by businesses and consumer attitudes being higher or lower. The key aspect; however, is whether these processes are working toward alleviating excesses, as occurs in a recession, or generating greater activity, as occurs in a recovery becoming expansion. GDP is merely an accounting method to sum up the final value of goods and services produced at the end of each calendar quarter as a result of all the underlying market processes. So, how does an economic recovery appear in the monthly economic reports? Again, it may surprise many, but "a recovery" looks a lot like what we are seeing in the monthly figures — choppy indications of rising economic activity. While all recoveries are different, they are also being affected by long-term trends that are altering the ability to define them relative to past recoveries. For example, in the 1970s, arguably the closest comparison to today in terms of depth and breadth of the respective economic and market downturns, the U.S. was still a principal manufacturer of what it consumed. Today, our demand for goods is increasingly met by production abroad, in countries such as South Korea, China and Brazil, for example. This is true not only of the U.S., but of most developed nations. To look for signs of a manufacturing rebound in the U.S. as a sign of improved broader economic conditions, is virtually for naught these days. In fact, by the time it is seen here it has probably long been underway. Rather, in an increasingly global economy, we need to take a much broader perspective into assessing "our economy." While forecasters have been lamenting the persistent economic declines in the U.S. and Europe in the just completed second quarter, the "manufacturers" have been showing signs of actual improved growth. Much of this improvement has to deal with the dwindling level of excess inventories in developed economies, which is spurring renewed production activity in developing countries to meet a mere stabilization of consumer spending and business investment in countries such as the U.S. While a recent decline in U.S. consumer attitudes has been viewed as foreboding that the prior strength in emerging markets may wane again, to others, i.e., us, the data has been remarkably resilient. The recent declines in Consumer Confidence reported recently need to be placed in context. First, consumers don't spend confidence. We may try to save a little around the margin, but relatively fixed living expenses largely determine the bulk of spending. And the fact that consumers can save, does say something about improved personal balance sheets. Second, consumer attitudes are still sharply improved since earlier this year. By the numbers, the economy is still shrinking and job losses have only accumulated further, yet for some reason, consumers say they feel better. We could easily make a case that the decline in consumer attitudes could have been worse, in fact should have been worse, if something more fundamental wasn't at work to support them. Given the recent sharp rise in gas prices despite the economic malaise, continuing job uncertainty, persistent reports of foreclosures and rising delinquencies on all forms of consumer debt, renewed geopolitical concerns ranging from Iran's election to North Korea's missile launches, it seems that to sustain the improved level of consumer sentiment must say something about a more fundamental underlying improvement amongst consumers. So could the signs of recovery be any clearer? In theory yes, though in practice probably not. The key will arguably be the extent that consumers continue to spend, not necessarily at a faster rate, but more broadly so that their dollars benefit a wider swath of companies. Subsequently, the extent that businesses invest in new products and services to appeal to the ever changing desires of their customers — we consumers — will be the principal determinant of how robust the ensuing economic expansion is. With business inventories at increasingly lean levels, a broadening of spending and investment, even at low levels, should have a pronounced impact on broader economic activity, and consequently how secure employees/consumers feel about their situations. Until then, choppy indications of recovery will be the norm — this is normal, and a clear sign of recovery. Back to TopTaking Money Out of the United States By Howard Aschwald, CFA Many media commentators are talking down the United States. Some suggest putting most of one's investment assets outside of the U.S. We are also concerned about the growing deficit and the 80+% debt to GDP ratio (a post WW2 high) The burdens of entitlement programs such as Social Security, Medicare, and Medicaid are going to increase. We agree with the naysayer's that the current financial and economic problems will lower U.S. growth rates and levels of productivity for the next several years. Lower growth does not mean, negative or no growth. We do not share the view that the dominant status of the U.S. is in jeopardy. In terms of overall GDP, GDP per capita and equity market capitalization, the U.S. excels and will continue to do so for the foreseeable future. Further, the performance of U.S. Treasuries and the U.S. dollar relative to all other assets in this crisis clearly shows that the U.S. is still the safe haven for capital. Finally, the U.S. also ranks above most major developed and practically all emerging market countries in terms of work-force education. This forward-looking statistic corresponds with long term prosperity and economic growth. Despite the fact that we could be doing a better job in this area, our education system still continues to be better than most of the world. It is smart to make investments into assets that should perform well over the long term. Emerging market economies such as India, China and Brazil will continue to grow much faster than the U.S. or Europe. However, their stock markets are much more volatile and their business climates are much less certain than the developed world. Furthermore, many U.S. based multinational companies will see the majority of their future growth through their investments in these economies as well. So, it's not a necessity to invest directly in these countries when there are U.S. companies already doing this. That said, in the short run, some exposure to foreign currencies and foreign companies should enhance return and lower overall portfolio volatility. While this benefit of diversification works most of the time, there are times (like last fall) when almost everything will go down simultaneously. The United States has a solid history of overcoming adversity and recovering from poor economic decisions. The U.S. has faced many crises in the past and this is certainly one of the worst. But the U.S. is better positioned than most to recover from this and take advantage of the irreversible trend of globalization and continued technological innovation. The U.S. stock market is both broad and deep with world class companies available for purchase at (currently) reasonable prices. As such, investing the core of one's assets in the U.S. remains both prudent and appropriate. Back to TopWhat Your Spouse Must Know About Investing By Stephen Bradley Within every household, most couples divide tasks that they are responsible for. Handling household financial affairs is a task that usually falls to one spouse or the other. Of course, there are some couples who are equally engaged in the process of budgeting, bill-paying, saving and investing. But in most families, these jobs are the exclusive domain of just one partner. The key risk you run in single-handedly managing your family's financial affairs is what if something happens to you. Would he or she know how to manage the family nest egg? Even if you're fit as a fiddle, make sure that your spouse would know how to handle the following issues if something were to happen to you.
Back to TopQuarterly Economic Update By Howard Aschwald, CFA The quarter in brief. We just saw the best quarter for stocks since 1998 — the S&P 500 gained 15.2% from April to July.1 The global rebound in equities was simply phenomenal this spring. All of it happened while two major automakers went through bankruptcy; major banks weathered the drama of stress tests, and oil prices took off. The Obama administration proposed more reform, and indicators offered hope and hints of economic recovery. Domestic Economic Health Some key indicators moved into the plus column this spring. Consumer spending was up 0.3% in May after a flat April; personal income was up 1.4% in May after rising 0.7% for April.2 Retail sales? Up 0.5% in May, following a 0.2% contraction in April.3 Durable goods orders rose 1.8% in both April and May.4 Perhaps we were taking advantage of lower prices. The Consumer Price Index dropped 1.3% between May 2008 and May 2009, the biggest year-to-year decrease since 1950. CPI was flat in April and only rose 0.1% in May.5 Turning from individuals to institutions, it was another trying quarter for banks and automakers. Chrysler and General Motors each filed for Chapter 11 bankruptcy; with the help of the federal government, Chrysler found a buyer in Fiat. The government simply took a 60% stake in GM as it fostered its reorganization.6 High anxiety preceded the Federal Reserve-administered stress tests of 19 major U.S. banks, and 10 of 19 banks were directed to find more capital — most notably Bank of America, which was told to find another $34 billion. Other big banks (among them Goldman Sachs, American Express, MetLife, Capital One, and JPMorgan Chase) were judged adequately capitalized.7 In Washington, reform was in the air. In May, Congress passed new rules forcing credit card issuers to notify cardholders of rate hikes 45 days in advance, restrict credit limits for teens and collegians, and curb retroactive rate increases.8 June saw the Obama administration and Congressional leaders working hard to revamp financial industry regulations and the American healthcare system. The President proposed making the Federal Reserve the great watchdog over major banks, insurers and other financial industry firms. Proposed legislation would give the Fed, Federal Deposit Insurance Corporation and Treasury more power and set up a Consumer Financial Protection Agency to police mortgages and derivatives and credit cards.9 Now, should the government get into the healthcare business? In the vision of the President, such a move could make health care and health insurance more affordable and accessible to 45 million more Americans. Two versions of a bill to do so meandered through Congress in spring. The House version included a government-sponsored healthcare option, and the Senate version jettisoned that idea.10 Major Indexes Look at the turnaround. At the end of June, the S&P 500 was an incredible 35.89% above its March 9 low. History will record 2Q 2009 as the best quarter for the S&P since 4Q 1998, the hottest quarter for the NASDAQ since 2Q 2003, and the best quarter for the Dow since 4Q 2003.1 Global Economic Health Were things getting better, or not? The jury was out — though plenty of opinions were in. The World Bank said things were getting worse — it revised its 2009 forecast in June, projecting 2.9% global economic contraction for the year instead of the previously speculated 1.7% decline.11 "We need to clean up the banks," European Union commissioner Neelie Kroes stated in June, adding that the global economy was "far away from a proper recovery."12 Then again, finance ministers in Japan and South Korea felt the world economy showed signs of bottoming, and in late June, the Organization for Economic Cooperation and Development positively revised the economic forecast for its 30 member nations for the first time since 2007.13 World Financial Markets The rally was truly worldwide. Some 2Q 2009 performance statistics: Hang Seng, +35.38%; Shanghai Composite, +24.70%; Nikkei 225, +22.80%; FTSE 100, +8.23%; DJ Stoxx 600, +16.64%; CAC 40, +11.87%; the DAX, +17.72%. The Australia All Ordinaries gained 5.42%; South Korea's Kospi gained but 1.51%.14,15 Three emerging-market indices gained more than 40% last quarter. India's Sensex advanced 49.29% to put it up 50.24% across the first half of the year. Russia's seemingly boom-or-bust RTSI gained 43.12% — and ended the first half of 2009 up 56.20%. Argentina's Merval index rose 41.03% last quarter.15 The MSCI World Index gained 19.7% in 2Q 2009; between the March 9 close and the June 30 close, it gained 40.0%. Its sibling, the MSCI Emerging Markets Index, climbed 33.6% last quarter and ended the quarter 56.9% above its March 9 close.16 Commodities Markets It was quite a quarter. Oil futures finished 2Q 2009 at $69.89 per barrel for a 40.74% 2Q gain. Oil hasn't had a quarter that hot since 3Q 1990. Oil ended 2Q 2009 up 56.70% for the year. Diesel, RBOB gasoline and heating oil also had strong quarters with double-digit gains.17,18 Among precious metals, copper couldn't be ignored, gaining 22.78% for the quarter to put it up 61.86% for the first half of the year. Gold ended 2Q 2009 at $927.10 an ounce, eking out a 0.49% quarterly gain — gold futures fell 5.28% in June, but ended the first half up 4.92% for the year. Silver futures rose 4.5% in the quarter to go up 20.0% for the year at the end of June.17,19 Turning to the dollar; it lost 2.66% versus the yen and 5.30% against the euro in the quarter.20 In crop futures, soybean and sugar prices respectively gained 29% and 33% across the quarter; corn futures slid 9.3%, their fourth straight quarterly loss.21,22 Housing and Interest Rates Were existing home prices cheap enough to spur a sales recovery? Was anyone interesting in buying a new home? Would rising Treasury yields send mortgage rates upward? The respective answers were maybe, maybe not, and perhaps slightly. Answers were still hazy in a sector in which the bottom may or may not have emerged. Pending home sales rose in May for the fourth straight month, according to the National Association of Realtors. When was the last time that happened? July-October 2004.23 Existing home sales rose in April and May, although the May median sale price was 16.8% below the median price a year ago.24 New home sales went north 2.7% in April but fell 0.6% in May.25 Comparing the Freddie Mac Weekly Primary Mortgage Market Surveys from April 2 and July 2, we see that average rates on 30-year FRMs rose from 4.78% to 5.32%. However, average rates on 5-year ARMs decreased from 4.92% to 4.88% within that time frame. Rates for 1-year ARMs went from 4.75% to 4.94%. As for 15-year ARMs, average rates went from 4.52% to 4.77% during this stretch.26,27 Third Quarter Outlook The bullish might want to consider the latest Reuters quarterly poll of 150 equity strategists worldwide. In their collective opinion, the S&P 500 will gain another 8% by the end of 2009. As great as all that sounds, the U.S. and global economy just don't seem to be rebounding as fast as the markets would like. With unemployment numbers still weighing on stocks at the top of July and the real estate sector still weak, some economists think things won't really pick up until the end of the third quarter or the start of the fourth quarter. We think a turnaround will become more obvious as the year progresses and commentary from the media will become more constructive. Citations 1 cnbc.com/id/31670314 [6/30/09] 2 money.cnn.com/2009/06/26/news/economy/personal_income/?postversion=2009062609 [6/26/09] 3 census.gov/retail/marts/www/retail.html [6/11/09] 4 money.cnn.com/2009/06/24/markets/markets_newyork/?postversion=2009062417 [6/24/09] 5 bloomberg.com/apps/news?pid=20601068&sid=ah5hyV.4zUcQ [6/17/09] 6 usatoday.com/money/autos/2009-06-01-gm-bankruptcy_N.htm?loc=interstitialskip [6/1/09] 7 federalreserve.gov/newsevents/press/bcreg/bcreg20090507a1.pdf [5/7/09] 8 smartmone y.com/personal-finance/debt/tighter-credit-card-rules-pass-senate-milestone/ [5/22/09] 9 topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/financial_regulatory_reform/ index.html [6/17/09] 10 bloomberg.com/apps/news?pid=20601103&sid=aki1sLcOe4GM [6/26/09] 11 marketwatch.com/story/treasurys-up-on-world-bank-outlook-fed-buyback [6/22/09] 12 online.wsj.com/article/BT-CO-20090623-703072.html [6/23/09] 13 bloomberg.com/apps/news?pid=20601101&sid=ayv2y3z6PgAM [6/27/09] 14 blogs.wsj.com/marketbeat/2009/06/30/data-points-asia-europe-70/ [6/30/09] 15 cnbc.com/id/31681486 [7/1/09] 16 investmentpostcards.com [7/2/09] 17 blogs.wsj.com/marketbeat/2009/06/30/data-points-energy-metals-69/ [6/30/09] 18 cnbc.com/id/31572710/page/2/ [6/26/09] 19 marketwatch.com/story/gold-nearly-flat-heading-for-4-monthly-loss [6/30/09] 20 online.wsj.com/article/SB124640700764876885.html [7/2/09] 21 online.wsj.com/article/SB124640544999576627.html?mod=googlenews_wsj [7/2/09] 22 bloomberg.com/apps/news?pid=20601103&sid=a8E10zbitkmc [6/30/09] 23 money.cnn.com/2009/07/01/real_estate/May_pending_sales/?postversion=2009070110 [7/1/09] 24 features.csmonitor.com/economyrebuild/2009/06/23/us-existing-home-sales-edge-up-24-percent/ [6/23/09] 25 online.wsj.com/article/BT-CO-20090624-709033.html [6/24/09] 26 freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp[7/2/09] 27 businessweek.com/ap/financialnews/D996DVO80.htm [7/2/09] 30 T141504Z_01_LU614869_6/30/09] Back to Top |
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