Mark Levy’s Economic Update – Wednesday, November 06, 2013
My last newsletter focused on the concern of the United States Government shutdown and the debate between Republicans and Democrats over raising our country’s debt limit. It is amazing how front page concerns can so quickly change, isn’t it? What is also amazing is how the stock market, in spite of our worries, has appeared to shake these concerns off and continue to advance. One reason for good equity performance has been the recent reporting of corporate earnings. According to Don Hays, as of November 4, 2013, about 70% of companies have reported earnings above analysts’ expectations. This is higher than the long term average of 63% and is also above the average of the past four quarters of 66%. Additional positive news has come from the American consumer. After declining spending during the recession, there are indications the consumer may be returning. Second quarter 2013 flow of funds data indicates that households and corporations may be back to borrowing, which will add private sector spending stimulus to the economy. Beyond U.S. borders, the European financial crisis and China’s slowdown also have impacted the U.S. economy’s rate of recovery. As these two economies stabilize, their impact on U.S. GDP growth is no longer negative. From a global perspective, Europe and China should provide another leg of growth for our economy. So, the news for equities is good, which is not to say that a correction phase cannot happen at any time. We just don’t think at this juncture that a correction is going to be long or protracted. As a matter of fact, recent data by Davis Advisors shows that after decades of low performance, a decade of good performance usually follows, although past performance is no guarantee of future performance. Equity returns for the decade of 2002 – 2011 were 2.9%, a very low number. That possibly bodes well for the 2012 – 2021 period that will follow. So what are our worries? We worry about the decline of bond portfolios in a rising interest rate environment that we seem to now be in. Municipal bonds, high yield corporate bonds, certificates of deposit and cash feel better to hold than longer term treasury bonds. We worry about stock market corrections. Investors are becoming more accustomed to rising equity prices and therefore tend to become complacent and are not prepared for corrections. We worry that investors will continue to underperform the markets because of their emotions. That is why Legacy Wealth Planning exists and we believe our role is an important one; to help guide clients toward their financial goals, not away from them. We wish you a Happy Thanksgiving – your 2014 Buckaroo Calendars will be arriving shortly. – Mark 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. * Stock investing involves risk including loss of principal. Economic forecasts set forth in this presentation may not develop as predicted. Past performance is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income from Municipal Bonds may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. High yield bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. CD’s are FDIC Insured and offer a fixed rate of return if held to maturity. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Referenced material: Hays Advisory Market Comment dated 11/4/13, LPL Financial Economic Commentary and LPL Financial Weekly Commentary, both dated 11/4/13. Davis Advisors Essential Wisdom for Todays’ Market.