Headwinds and Tailwinds

One pundit, and he’s not alone, said at the end of last week that “tailwinds we had at the end of the 4th quarter 2012 and into 1st quarter 2013 may be disappearing and turning into headwinds.”

Really?

The long-term trends on unemployment, hiring and housing are all positive. The Fed remains committed to a long-term easy money policy. The 4th quarter’s 0.1% contraction is likely to disappear when revised GDP numbers come out next week. Steadily rising auto sales and wage concessions from labor are leading to new manufacturing investments and hiring by the three Detroit automakers. And even with a bad two days last week when Fed minutes revealed disagreement over how long to keep buying bonds, the markets remain strongly positive for the year. Those are the tailwinds, and while they’re not fabulous, they’re good.

The headwinds, however, are definitely blowing.

The sequester now appears inevitable, but opinions about the consequences of cutting $85B at one stroke vary widely. Some economists think it could send the economy into recession. Others predict it will cut 2013 GDP growth from 2.6% to 2.0% and cost 700,000 jobs. And the most sanguine contrarians point out that similar government cutbacks in recent years have been anything but catastrophic, and the economy is strong enough to weather the blow. Wherever one falls on the spectrum of sequester seriousness, uncertainty about it is weighing on consumer confidence, as are higher gas prices and the end of the 2% cut in the payroll tax, the functional equivalent of a pay cut. Remember that consumer confidence drives consumer spending, and that consumer spending is the biggest single driver of the economy.

Europe is our largest trading partner; the European Union is warning that its economy will shrink for the second year in a row in 2013, and that France and Spain will miss fiscal targets designed to ensure stability of the Euro. For the first time since 2009, the combined GDP of 34 major developed countries is shrinking, indicating widespread weakness. A major reason for the decline, and for the weakness of the recovery from the Great Recession, is the decline in government spending. During the first decade of the 21st century, government spending in the Euro zone and the U.S. grew every year. Budget cutting at all levels of government is now epidemic in the U.S.; austerity is now the norm in Europe.

As always, your best strategy in the face of winds from any direction, and from the unpredictability of the markets in the short term, is a portfolio diversified by both asset class and risk. And a determination to remain invested for the long term, without being swayed by emotion.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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