Market Volatility – Our View

June 26, 2013

The market is acting odd. Ben Bernanke is hinting that he is going to scale back the loose monetary policy that has, theoretically, been supporting the US economic expansion. He is hinting at the change because he thinks the economy is reaching a level of stability that growth can continue with more normal policy out of the Fed. The improving economy would usually be a good news story for stocks; the most knowledgeable economist in the country thinks the economy is getting better – how is that not good news?

Well, sometimes when economic growth picks up, it results in higher levels of inflation, and that inflation can have a nasty impact on stock price. However, that doesn’t seem to be the case this time around. In fact, inflation expectations are falling, not rising; so inflation doesn’t explain what’s going on. What seems to be happening is a fundamental disagreement between investors and the Fed. The Fed thinks it’s safe to stand up and walk around the plane, while Wall Street thinks we need to keep the “fasten seat belt” sign lit, and to keep it fastened tightly! Wall Street’s concern is that if the Fed is wrong, and if they withdraw support too fast, the economy could slip back into recession.

We don’t envy the Fed’s position. If the Fed continues with their bond-buying, the chorus of Wall Street pundits will scream about inflation. If they take off the safety belt sign, the chorus screams about recession. It seems like a lose-lose situation, but in the end it doesn’t even really matter all that much. The markets are choppy, and always will be. The proof of the direction of the economy will be in the numbers: are companies earning more? Are people getting back to work?

Bernanke knows what he’s doing; if the numbers don’t demonstrate continued growth, he’s not taking the seat belt off. So, while there is a lot of turbulence right now, we don’t think we will go flying out of our seats anytime soon.


The Resilient Consumer

April 17, 2013

If you’re trying to know where the American economy is going, your first step should be to put yourself inside the head of the American consumer.

According to The Wall Street Journal, almost half of American consumers are unaware that the return to higher Social Security tax withholding on January 1 meant an effective 2% pay cut. About 48% of workers didn’t notice the change in their 2013 paychecks; 59% of lower-income workers, those most likely to have no cushion, didn’t notice. Only 26% of low-income households, and only 30% of all households, have reduced spending in response.

Add in uncertainty about the future course of government policy, both in America and internationally, and you’d expect consumer spending, which is responsible for roughly 70% of GDP, to be static, if not falling. Instead, after adjusting for inflation, it grew at roughly a 3% annual rate in January and February. The numbers may be skewed by a few anomalies, but even with March’s slight downtick, spending growth in the first quarter was relatively strong. What’s more, the Thomson-Reuters/University of Michigan index of consumer confidence rose more than expected in March, likely because of the strength in hiring and housing.

But there are downsides. March’s job growth was an anemic 88,000, dramatically smaller than the consensus view that non-farm payrolls would grow by 200,000. And the effects of the sequester’s large cuts in jobs and pay, directly on government workers and indirectly on the employees of government contractors, have yet to be felt.

We think that further growth in consumer spending, and therefore further GDP growth, is dependent on the private sector adding jobs at an accelerating pace through the spring. Stay tuned for April’s numbers at the end of the first week in May.

Headwinds and Tailwinds

March 1, 2013

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.”


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.


February 19, 2013

It’s a big word for the $1.2 trillion in automatic spending cuts over 10 years that Congress set up in the summer of 2012 when it couldn’t agree on how to achieve deficit reduction in return for raising the debt ceiling. So lawmakers set up automatic cuts and automatic tax increases to take effect if they couldn’t agree before the end of 2012. In other words, it’s the spending-cuts half of the fiscal cliff that remains after the tax-increases half was solved on January 1, 2013.

Federal workers will take cuts in pay, essential services to poor people will be reduced or eliminated, safety and law enforcement will be reduced, and small business loans will be cut.

The reduction in federal spending across the economy, and the reduction in spending power from the furloughing of Defense Department and other federal workers, will have a devastating effect on the economic recovery. A survey of money managers says they expect the Dow to drop by 5% if sequestration happens on March 1. But will it?

With little more than two weeks to go, the two parties agree it’s critical to avoid the automatic cuts, but they are far apart on how to accomplish that. Republicans insist that no more tax increases be part of any deal; Democrats want a 30% minimum tax rate on incomes over $1 million and the closing of corporate tax loopholes to be part of any cuts in spending. Stay tuned to see whether Washington can work out a compromise.

2013 Outlook

January 14, 2013

After a quick start to 2013 for economic data and events in recent week, the coming weeks are relatively quiet. The key domestic economic report due out this week is likely to be the latest weekly reading on initial claims, as markets focus on the unofficial start of the fourth quarter earnings reporting season. Five Federal Open Market Committee (FOMC) members are scheduled to speak this week, and almost all of them have spoken out against quantitative easing. Overseas, a full slate of Chinese economic data for December 2012 are due out, as well as key central bank meetings in the Eurozone, the United Kingdom, and South Korea. In addition, both Spain and Italy will auction debt.

On balance, last week’s U.S. economic data on manufacturing, employment, vehicle sales, consumer sentiment, and the service sector for December 2012 exceeded expectations, and kept real gross domestic product (GDP) on track to post a gain of between 1.5% and 2.0% for the fourth quarter of 2012. Any increase in GDP in the fourth quarter of 2012 would mark the fourteenth consecutive quarter of economic growth since the end of the Great Recession in the second quarter of 2009.

Looking ahead into the current quarter (first quarter of 2013), growth may get a boost from a rebound from Superstorm Sandy, but the payroll tax increase that occurred as a result of the fiscal cliff deal signed into law by President Obama will put a dent into consumers’ disposable income in the
quarter, and leave real GDP growth around 2.0%. Looking ahead, failure failure to address the debt ceiling (and lingering sequestration issue) may lead to a recession in early 2013, while a quick resolution to the looming debt ceiling debate along with a “Grand Bargain” to address the nation’s longer term fiscal issues could lift real GDP growth into the 3.0% range for the year.

On balance, the first quarter, and indeed 2013 in general, is shaping up as follows: On the positive side:

  • Rebuilding of infrastructure and housing stock damaged by Sandy;
  • A continuation of recovery in the housing market;
  • A reacceleration in growth in China and emerging markets, which will help boost exports; and
  • A rebound in business spending after fiscal cliff and election-related uncertainty hurt business capital spending in the fourth quarter of 2012; should help offset the following negatives;
  • Tepid consumer spending;
  • Weak federal and state and local government spending; and
  • Muted contribution from net exports with Europe still in recession.

Overall, from an economic standpoint, 2013 may look and feel a lot like 2012.

Fiscal Cliff Details

January 4, 2013

It is a moderately Happy New Year. Congress has passed, and the President has signed, the new revenue half of a solution to the fiscal cliff. The new bill, passed 257-167 by the House and 89-8 by the Senate, provides clarity on tax rates for most U.S. households, but delays major decisions on fiscal spending until the end of February.

It makes Bush tax cuts permanent for households with income below $450,000 (couples) and $400,000 (individuals), and on income above that amount, raises marginal rates from 35% to 39.6%. It creates a permanent fix to the Alternative Minimum Tax (AMT) for the next 10 years. It increases estate tax rates from 35% to 40% for estates larger than $5 million. It helps the long-term unemployed by extending expiring jobless benefits. And, the major impact to working people, it allowed the temporary 2% reduction in Social Security payroll tax to expire, returning to the previous rate of 6.2%.

There are certain things we’d like to make you aware of from a financial planning perspective:

•   This first one is time-sensitive. The IRA direct transfer to charities deadline has been extended to the end of December 2013 for those who are 70½ years old and older. For those that took an IRA distribution between December 1, 2012, and December 31, 2012, and wish to transfer all or a portion of your distribution to a Charity (up to $100,000), you may do so by February 1, 2013. Also, for the month on January 2013 you may make a rollover and have it count as a 2012 rollover. There are several dates to be aware of and a transition rule in case you forgot to take your Required Minimum Distribution last year.

•   The rise in income tax rates on the highest earners and on dividends may influence your ratio of taxable to tax-deferred accounts and the types of investment vehicles in your portfolio.

•   The increase in the estate tax rate adds certainty that was missing in estate planning because of the pending expiration of the old rates. Estates that are affected should consider gifting and wealth transfer strategies. Minnesota estates are still taxed at the $1M level; make sure your estate planning documents are up-to-date.

•   The fix to the AMT makes certain investments in middle- and upper-middle-income taxable portfolios more desirable and others less so.

•   There will be increased opportunities for investors to do Roth conversions. This may or may not be a good idea for you and you should consult with your advisory team before acting.

•   The bill includes extensions for some tax credits and deductions, and limitations on others.

•   While the bill extends jobless benefits for the long-term unemployed, we recommend setting aside a cash reserve. Even if your job is secure, it’s a smart place to get money when you need it.

That’s the mostly-good news. While, technically, the United States went over the fiscal cliff on January 1, by passing the bill before markets opened for the first time in 2013 on Wednesday, Congress was able to avoid further damage to investor sentiment. Needless to say, market reaction has been very positive due to the avoidance of the near-term recession risk.

But what didn’t happen is a fix to the other half of the fiscal cliff. Congress and the White House failed to address deficit reduction; the bill delays for two months $109 billion in automatic, across-the-board spending cuts.

The failure to act keeps Washington on a potentially risky fiscal-policy path. By postponing difficult decisions on the debt ceiling, benefit programs, government spending and a tax overhaul, the deal all but guarantees that Democrats and Republicans will continue to clash on major fiscal issues throughout 2013.

We believe that the political machinations will continue to create noise in the market and we caution clients about being too consumed by headline news. We are advising clients to review with their advisor team how they might potentially benefit from the tax changes, and then to remain disciplined by adhering to a well-considered strategic allocation that fits their values and long-term financial goals.

Our financial planning department, our investment team and our financial advisory teams are all available to answer your questions.  You may also ask questions via our website:

Does Black Friday Mean Green for Investors?

November 30, 2012

Retail sales during Thanksgiving weekend — the traditional start of the holiday shopping season — climbed 13% as more shoppers hit the stores and spent more money, according to the National Retail Federation, wildly exceeding consensus estimates. The news helped to lift stocks on Friday, making for the strongest week for stocks since early June 2012.

Retail sales matter to the stock market mainly because they reflect the health and sentiment of the consumer and investor [Figure 1], but also because they contribute to the growth of the economy and corporate profits.

Does a Black Friday for retailers assure a green holiday season for investors? Not necessarily; there have been years where positive fourth quarter retail sales did not bring positive results for the stock market. In fact, there is not even much of a relationship between how well holiday sales results fare against forecasts and stock market performance. To illustrate this point, over the past 20 years, the performance of the S&P 500 during the period from Thanksgiving through year-end was about the same (2.7% vs. 2.5%) when retailers exceeded the widely followed forecast from the National Retail Federation compared to when they were in line, on average.

The question of what Black Friday means for investors actually has the relationship backwards; it is instead the gain in the stock market that is the predictor for retail sales during the holiday season. This makes sense since the stock market is one of the best barometers of consumer confidence and, if it is rising, it stands to reason that consumers are feeling a bit more confident and willing to spend.

With the S&P 500 Index having gained 12% this year, it should be no surprise that early reports of sales this holiday season have been solid:
• The National Retail Federation reported Thanksgiving weekend sales up 12.8% over last year. Shoppers spent $59 billion over the weekend, with the average shopper spending $423.
• Online sales trends have been very strong, with sales estimated up 26% from last year on Black Friday. Tight inventories may have forced many to go online in search of favored styles and colors. Strong online sales have prompted shipping companies to issue solid outlooks, with UPS predicting a 6.2% increase over last year and boosting seasonal hiring by 10%. Federal Express is forecasting a gain of 12% between Thanksgiving and Christmas.

What Is Driving All This Demand From Consumers?
• A rising stock and housing market has helped consumers feel wealthier, plus the modest increase in jobs and paychecks may have given consumers the confidence to boost purchases during the holiday season.
• Consumers’ balance sheets look a lot better. The percentage of income consumed by financial obligations, such as a mortgage, rent, auto, and student loans has fallen to a level not seen since well before the financial crisis and is below the long-term, 30-year average.
• Consumers are starting to borrow again. U.S. consumer debt has fallen by about $1.3 trillion since the pre-recession peak, according to the Federal Reserve, with credit card debt being one of the most sharply contracting categories. But in four of the last six quarters, American households’ credit card borrowing has increased after having fallen for 11 consecutive quarters.

Stocks, particularly those of the retailers, have reflected the improving consumer incomes and balance sheets, and now sales may begin to reflect the release of pent-up demand. While stocks are already signaling gains in sales this holiday shopping season, the performance of retailer stocks has been pointing to solid gains with the S&P 500 Retail industry group of stocks posting a gain of 2.4% relative to the decline of -1.8% in the S&P 500 so far during the fourth quarter.

However, one weekend does not make a season. Stocks have slumped so far in the fourth quarter, and retail sales have yet to break out of their slump. The widely watched weekly measure of retail sales from the International Council of Shopping Centers has averaged a relatively consistent year-over-year gain of 2 – 3.5% during the second half of 2012. If sales do begin to accelerate, it may be good news for the economy. A more confident consumer leads to more confidence in corporate America, which may lead to brighter prospects for job and economic growth in 2013.