Government Shutdown: Our View

October 7, 2013

The failure in Washington is disappointing, if not a surprise. However, history tells us it is not necessarily a bad thing for investors. The 16 government shutdowns over the past 37 years, which have ranged from one to 21 days, have not been particularly negative for stock market investors, averaging only a 2% decline for the S&P 500. More importantly, from a longer-term perspective, they preceded above-average returns. The S&P 500 Index has risen 11% on average in the 12 months following the shutdowns, compared with 9% for all periods. Notably, in the last government shutdown 17 years ago in late 1995, the S&P 500 rose 21% in the subsequent 12 months.

As the government shutdown began on the morning of October 1, stocks actually rose after falling modestly in the preceding days. That reaction makes sense, since selling stocks into short-term political uncertainty has been costly for investors in recent years.

Of course, the shutdown is not the only issue facing investors from Washington. We are also approaching a breach of the debt ceiling on October 17, leading to the remote-but-heightened threat of default on some U.S. obligations if lawmakers fail to increase the limit on total U.S. federal government debt. Fear over the threat posed by the debt ceiling seems well contained at this point. For example, the VIX, often called the “fear gauge,” is currently around 16 and not at the 48 level seen in August 2011, when the debt ceiling was last the subject of a battle in Washington and stocks fell 17%. Also, default concerns currently seem minimal with the discount on the one-month T-bill at just six basis points versus 17 basis points at the peak of fear in early August 2011. Perhaps this is because the economic and fiscal backdrop in the United States, and especially Europe, is much improved relative to the 2011 episode.

While it is good news that the markets have been relatively steady, without a negative market reaction there is less pressure on politicians to compromise. Furthermore, the longer the shutdown goes on and the closer we get to the debt ceiling deadline, the more the market is forced to make politicians act. We continue to monitor events closely and believe this is not a time for indiscriminate selling but rather a time to look for opportunities to buy on weakness.

The Certainty of Uncertainty

December 28, 2011

In the past, one thing most working Americans could rely on was an affluent retirement. You worked hard all your life, saved prudently, and as a reward – with the help of your employer and the government – you and your spouse received a healthy income for the rest of your lives. Unfortunately, in the 21st century most Americans cannot rely on those certainties – retiring in this century means the only thing you can be certain of is uncertainty.

For example, take your health. Will you stay healthy in the future or have to deal with an injury or illness? You can hope for the best but should plan for the alternative. No one knows what kind of health they will have during their retirement. And just because you are entitled to Medicare, it doesn’t mean you won’t end up paying out of pocket for care and medications. On top of that, Medicare as we know it today may be very different in years to come. The key to health care in retirement is being able to afford medical coverage and remain physically independent as long as possible.  Whatever happens, you need to plan for health care uncertainties. That could be with extra insurance, it might be through extra savings or just by signing up to the right program.  Whatever it is, you need to be ready. 

Taxes are another uncertainty. Current talk of deficits and the national debt, in the midst of shifting political winds, means that taxes will likely change over the coming years. Your being in retirement is no guarantee that you will be immune to this uncertainty.

Depending on how much of your retirement income you take out and when, you may still face substantial tax bills through your retirement. Also, if your retirement income is large enough, you can be taxed on social security income. So just because you stop working, it doesn’t mean you stop being affected by tax hikes and cuts.  You should include tax uncertainties on your list of retirement considerations or you might have some nasty surprises during tax time in your retirement years.

We’ve just been through one of the worst recessions in our country’s history. It was a recession few of us could have predicted and one that made many people reassess what they can rely on in terms of investment and growth. We don’t know what the stock market is going to do over the next 5, 30 or even 50 years – but, whatever the market does, you need to be certain that your retirement income can sustain your lifestyle. 

That means diversifying your investments and having a long-term plan. By planning ahead you can be prepared for either a bull or a bear market. And, you can protect your assets against uncertainty. 

Be ready for the future
The problem is, too many people are putting off their retirement plans until tomorrow. And, no one has a crystal ball. To protect yourself from the uncertainties that may face all of us in retirement, you should plan sooner rather than later.

When asked about financial priorities in today’s changing environment, people are almost seven times as likely to say their core goal is “achieving financial peace of mind” versus “accumulating as much wealth as possible.” And that’s obvious, because the confidence that comes with knowing that you are prepared for the uncertainties of the future is, as the commercial says, priceless.

 Wealth Enhancement Group

Last week’s data, next year’s economy

November 28, 2011

The numbers are in. Retail sales are up two months running. Black Friday online sales were up 26% over last year. Industrial production is up. Permits for new single-family homes are at their highest point in a year and a half. Inflation is down, and the number of people applying for jobless benefits is near the lowest point since April. The economy may not be dancing a jig, but it has risen from its deathbed and is up and walking around. Few, if any, economists are predicting a double-dip recession; their consensus estimate puts fourth quarter GDP growth at 2.5%

So why was the S&P 500, the broad measure of market performance, down 4.8% for the week after being down 3.5% the previous week?

One reason is questions about the long-term sustainability of the recovery. Roughly 70% of GDP is consumer spending. And consumer spending is dependent on people having jobs. The economy added 80,000 jobs in October, down from 158,000 in September and 104,000 in August. It needs to do much better, at least 200,000 per month in order to reduce the current 9.0% unemployment rate. The growth in retail sales can’t continue unless hiring increases and wages rise. Neither of those things is happening at a self-sustaining rate.

The other reason is Europe, which promises to be a source of financial instability for the foreseeable future, and a drag on the confidence of American markets and businesses. 

In the short term the cascading series of potential failures, Greece to Italy to Spain to France, has financial markets unsettled; banks on both sides of the Atlantic own trillions in European sovereign debt.

In the medium term Europe faces the likelihood of recession, in large part due to the failed policy of budget cutting to trim deficits instead of spending to create job growth. That means decreased demand for American goods from our biggest trading partner and fewer American jobs created.

The net: uncertainty continues to reign on Wall Street, on Main Street, and across Europe, so it is important to keep your portfolio diversified. We’re watching the markets and keeping our options open to make prudent investment shifts as necessary.

James Copenhaver, Director of Investment Management

Current Economic State: “Shaky Stability”

October 12, 2011

A respected economist recently referred to our current economic state as “shaky stability.” It isn’t often that an oxymoron is more than an amusing description, but this one is particularly apt.

Unemployment is stuck at 9% and has been since spring. Job growth is stuck at an average of 72,000 per month and has been since spring also. The economy is creeping along just fast enough to employ new workers entering the labor market, but not fast enough to budge unemployment. We’re not in a recession, but we haven’t recovered from the last one either.

That’s the stability part, and it isn’t a good stability.

The economist didn’t talk much about the shaky part, but it’s pretty clear. The U.S. political process is shaky, with the two parties unable to agree on measures that would lead to economic recovery and growth. Europe is shaky, with the countries of the Euro Zone unable to agree on measures that would save their banks from the cascading failures resulting from a Greek default. Even China, the engine of global growth, is shaking a little as its furious rate of modernization inevitably slows.

The Greek default situation right now is the event most likely to shake the stability. A solution to the Greek debt crisis, or measures that would spur U.S. job growth, could inspire business and consumer confidence that would lead to long-term, self-sustaining economic growth.

The future is uncertain. Stay tuned.

James Copenhaver, Director of Investment Management



Economist Jared Bernstein:

Market Response to the Federal Reserve Comments

September 26, 2011

On Wednesday, September 21, the Federal Reserve made several announcements following its September meeting, which on the surface appeared to be positive, but the markets globally have reacted negatively.

The Committee intends, by the end of June 2012, to purchase $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated.

The markets appear to have focused on the pessimistic view of slow growth and have turned attention to the continuing uncertainty of the outcome of the European debt crisis and the impact on the U.S. and world economies. This uncertainty will continue the pattern of risk-on risk-off trading that has contributed to the recent volatility.

President Obama and Fed Chairman Bernanke Give Speeches on the Economy

September 13, 2011

On Thursday, September 8, both President Obama and Fed Chairman Bernanke gave speeches on the economy.

Most of what Bernanke said, he’s said before. After all, American business is sitting on huge amounts of cash that it isn’t investing. It isn’t borrowing to grow either. The Fed has done everything non-inflationary that it can to send interest rates to historic lows to encourage spending. Spending isn’t happening, so what more can the Fed chairman say?

Something interesting.

Bernanke said he thought Americans were overly pessimistic about the economy. Given the numbers on wages, debt, loan rates and housing prices, consumers should be spending more, creating demand and growing the economy. Instead, they’re doing exactly what business is doing: not spending. The cycle of pessimism feeds on itself, stifling demand, which in turn stifles growth.

Perhaps the main cause of that pessimism is unemployment and the lack of job growth. That’s where President Obama’s speech comes in. The American Jobs Act that he proposed has $240 billion in employee payroll tax cuts through 2012, tax cuts for small businesses, and a small business tax holiday for hiring new employees. It has $140 billion for modernizing schools and for repairing roads and bridges. It has $35 billion for saving teacher jobs and hiring new teachers.

Moody’s Analytics’ chief economist Mark Zandi says the president’s jobs package would likely create 1.9 million payroll jobs, grow the economy by 2%, and cut unemployment by 1%.

Is it big enough? Maybe. It needs to go beyond staving off another recession to jumpstart self-sustaining growth for the economy. Is it apportioned right? Maybe. Direct spending is historically more effective than tax cuts, but tax cuts work.

And can it be passed by the most bitterly divided Congress since the 1850s? We’ll see.

James Copenhaver, Director of Investments

Catalysts on the Horizon – Part 3

September 23, 2010

5. The fourth quarter of mid-term election years is almost always favorable for stocks. The market’s reaction to mid-term elections, as uncertainty fades, has almost always been positive, with fourth quarter gains averaging 8% in mid-term election years. So far, the stock market performance in 2010 has tracked the typical pattern for U.S. stocks in mid-term election years, albeit with a bit more than the usual volatility.

6. If history is any guide, the disappointingly soft economic data over the past few months may soon begin to firm. Looking back over the past 60 years, about one year after the start of every recovery a soft spot emerges. Some closely watched indicators of growth are likely to be near the bottom of their typical soft spot-driven decline and poised for a rebound. As the data begins to firm later this year, the typical pattern of recovery may continue to unfold as it did in the post-recession recovery years of 2003 and 2004 when a late year rally in 2004 resulted in gains for the year.
Unfortunately, all of these potential catalysts are a month or more away while the economic data continues to disappoint.

The volatility that has defined this year is likely to continue with ongoing losses to be recouped by a late-year rally. In the meantime, we continue to find yield-producing investments attractive.

Catalysts on the Horizon – Part 2

September 21, 2010

3. Post-election clarity in Washington may begin to emerge. The balance of power is likely to shift between political parties following the elections. This may lead to more of a political balance in Washington and slow the pace of legislative change resulting in the “gridlock” the market has historically favored.

4. Following the election, the potential for tax cut extensions may become more visible. Based on comments in recent weeks, the party consensus among congressional Democrats on taxes seems to be eroding with some members increasingly in favor of extending the Bush tax cuts. After the election, it is possible PAYGO rules that require budget offsets to any tax cuts are waived allowing the extension of many, if not all, of the Bush tax cuts into 2011.

Identity Theft

May 23, 2010

Despite law enforcement and the general public’s understanding of identity theft crimes, the numbers of cases continue to rise. The insurance industry has responded to this problem by creating endorsements and adding coverage for the following to their homeowner’s policies:
• Costs associated with notarizing affidavits and sending these affidavits via certified mail
• Lost income due to taking time off work to deal with consequences of the loss
• Loan re-application fees and long distance fees
• Attorney’s fees
• Services aimed at assisting insured’s by directly contacting credit bureaus, creditors, etc.
Here are a few steps that can be taken to minimize one’s exposure to identity theft:
• Never place outgoing mail in your mail box.
• Never give any personal information such as your social security number to anyone unless absolutely necessary and the firm is trusted and reputable.
• Always shred all credit card offers received in the mail
• Obtain a credit report every year to ascertain that no one is damaging your credit.
• Always use passwords to protect your accounts.
• Be extremely vigilant about checking backgrounds of anyone with whom you propose to do business.
Should you become the victim of identity theft, here is a list of actions to take:• Contact credit bureaus, including Equifax, 800-525-6285, Experian, 888-397-3742, and Transunion, 800-680-7289. Alert them to place a “fraud alert” on your account.
• File a report with your local police department
• Contact all your creditors, credit card companies, banks and other lenders
• Close any accounts tampered with or opened fraudulently
• Notify your bank of check theft and close the account immediately.
• Complete the ID Theft Affidavit available through the Federal Trade Commission’s web site,
• Contact your attorney immediately to obtain professional advice.
• Contact your insurance agent for possible coverage.

China’s Choices

December 11, 2009

In normal times, the Chinese government uses the banking sector to send masses of low-interest rate loans to companies and sectors targeted for growth. This maintains growth and employment levels, preserving social and economic stability in a country with a massive population.

In times of stress, this aggressive lending goes into overdrive. The year 2009 has witnessed an unprecedented lending-surge by Chinese banks, who, under government direction, hoped to stave off a recession in China’s domestic economy as exports to the U.S. and rest of the world plunged. This has been a dramatic success. For example, the data reported for the month of October was very strong:

1. Growth of industrial value-added, which accounts for about half of China’s GDP, accelerated to 16% year-over-year.
2. Electricity production, a good growth barometer, grew by 17% year-over-year.
3. Steel production set a record 44% year-over-year gain.
4. Retail sales increased 16.2% year-over-year.
5. Vehicle sales totaled 1.2 million (more than the 838,000 sold in the U.S. in October).

By the end of the year, the net new loans fueling this growth are likely to total more than $1.5 trillion, which would equal over a third of China’s GDP. In October, the money supply was up 29.4% year-over-year and bank loans were up by 34%. This is a massive lending spree, even by China’s standards.

Much of the lending that was targeted to growth industries has leaked into the stock and real estate markets, which have rallied dramatically and are beginning to form bubbles. With subsidized loans still growing and the global economy now in recovery mode, the threat of double-digit inflation (already prevalent in India, another BRIC country) is looming.