By Marvin T. Ellis, Financial Consultant
After a difficult August, stocks opened September on a strong note. We have been in a sideways market for most of the last year, which has been caused by fear and uncertainty. The S&P 500, which was down close to 5% for the month of August, advanced 3.8% in the first week of September to close at 1,105. The S&P 500 closed 12/31/09 at 1,115 and a year ago (9/3/09) at 1,003. This is what we call a sideways market.
We do not feel we will have a double dip recession. The economic numbers don’t support it. We feel the only thing that would cause a double dip is massive fear; creating a self-fulfilling prophecy. That being said, we are seeing fear leave and confidence return.
What has caused this sideways momentum is in large part due to our government. The largest expense a corporation deals with is employee benefits. You ask any corporation what Obama Care is going to cost them and their response is “We Don’t Know.” Between the various tax changes, Obama Care and overnight regulation changes, corporations and individuals are holding onto their cash and paying down debts. They are unsure how to safely proceed. There is more cash sitting in corporation’s coffers then we have seen in decades. Instead of hiring full time employees, corporations are pushing more overtime and temporary staffing.
We feel this sideways market will continue until the elections this November. After the elections investors and corporations will see the direction our government is headed. As referenced in the chart below, if you look at stock market returns by political party control, the healthiest situation would be to have a Republican Senate and House and a Democratic President. Why? Because the stalemate environment reduces Congressional spending giving corporations and investors more incentive to plan and spend.
Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management. *In roll call votes where the majority in one party voted the opposite way to the majority in the other. Data compiled by professor Keith T. Poole and Howard Rosenthal available at www.voteview.com. Stock market returns are price only and calculated from election date to election date. Data are as of 6/30/10.
We feel that if a shift to more Republican or balanced control in congress occurs, recovery back to the highs of 2007 could resume on schedule and occur in 2 to 3 years. If little shift occurs and we continue with more dominant control by the Democrats, then the recovery could take 4 to 5 years.
To deal with these sideways markets we are making some changes to our portfolios which are designed to hedge your assets should the markets go down while also allowing your assets to gather as much of the up side as possible. This way no matter how many years the recovery takes, volatility can be better handled while government policies and corporate spending policies change. Please contact us if we have not contacted you for our recommendations.
Interest Rates – a Huge Issue
Another concern we see are rising interest rates. They have been declining for the last 30 years. They are about as low as they can go and have only one direction to move and that is up. As interest rates go up, bond prices go down. In 1999 & 2000 tons of money was flowing into tech companies which caused a huge bubble. We are seeing the same thing now, except fear is driving the money into bonds. When interest rates start rising, many bond holders are going to be drastically affected.
We have been doing a tremendous amount of research and looking at historical numbers on how to properly position bonds to handle rising rate changes. For now, you want to be evenly diversified in all the bond sectors so you can potentially take advantage of the best interest rates out there, but once rates start going up we will give you more direction. We will watch the yield curve closely and focus you on the sweat spots that could be less likely to be affected by interest rate increases.
Foreign GDP Helping Our Economy
AllianceBernstein has forecasted that Emerging Countries’ (China, India, Brazil, Argentina and etc.) Gross Domestic Product (GDP) is forecasted to be 7.6 in 2010 and 6.0 in 2011 which is almost twice what developed countries will produce. There have been huge increases in middle income earners in these foreign countries who are buying many American products for the first time. That flow of money is going to stimulate our economy and has been overlooked by many. It takes time for the flow of money to integrate into the system, but it is coming.
Year End Projections
We believe that if elections create a stalemate in Congress and that no major lame duck legislation is pushed through during the last two months of the year that we could see the markets end higher for the year. We are expecting more sideway movements until then with a slow steady rise in the markets afterwards. The profitability of most US publicly traded companies is growing steadily. This will insulate the markets from large downward corrections. Inflation is going to remain low for a few more years. Unemployment will continue to decline around 1% a year. But, as a nation we have to start facing some greater challenges: funding Obama Care, Social Security, Medicare and Medicaid. Our children’s future tax burdens do not look well, but we believe as a nation we will figure this out also.
Raymond James Investment Strategy Quarterly
Raymond James has a huge powerhouse of economic and market resources for us. They recently started to organize all the various departments, economists and research data into one quarterly newsletter. If you would like to dive deeper into some good research and economic data we recommend reading this newsletter. It is available to you online at http://www.marvinellis.com/deliver/markets.php.
Approval #: C10-19734. If you would like to stop receiving this newsletter please contact our office at 801-295-7373. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any options are those of Ellis Financial Group and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.
There are several e-mail campaigns making their way around right now claiming that, beginning in 2011, taxable income on Forms W-2 will be increased to reflect the value of employer-provided health insurance. A typical e-mail warns: “You will be required to pay taxes on a large sum of money that you have never seen. Take your last tax form and see what $15,000 or $20,000 additional gross does to your tax debt. That’s what you’ll pay next year. For many it also puts you into a new higher bracket so it’s even worse. This is how the government is going to buy insurance for the 15% who don’t have insurance and it’s only part of the tax increases.”
The claim is that, beginning in 2013, all real estate sales will be subject to a new 3.8% federal sales tax. The e-mails making this claim generally contain some variation of the following text: “Under the new health-care bill–did you know that all real estate transactions are now subject to a 3.8% sales tax? The bulk of these new taxes don’t kick in until 2013 … If you sell your $400,000 home, there will be a $15,200 tax.”
Bountiful, UT 84010
Our Market Outlook–3rd Quarter 2010
Monday, September 20th, 2010By Marvin T. Ellis, Financial Consultant
After a difficult August, stocks opened September on a strong note. We have been in a sideways market for most of the last year, which has been caused by fear and uncertainty. The S&P 500, which was down close to 5% for the month of August, advanced 3.8% in the first week of September to close at 1,105. The S&P 500 closed 12/31/09 at 1,115 and a year ago (9/3/09) at 1,003. This is what we call a sideways market.
We do not feel we will have a double dip recession. The economic numbers don’t support it. We feel the only thing that would cause a double dip is massive fear; creating a self-fulfilling prophecy. That being said, we are seeing fear leave and confidence return.
What has caused this sideways momentum is in large part due to our government. The largest expense a corporation deals with is employee benefits. You ask any corporation what Obama Care is going to cost them and their response is “We Don’t Know.” Between the various tax changes, Obama Care and overnight regulation changes, corporations and individuals are holding onto their cash and paying down debts. They are unsure how to safely proceed. There is more cash sitting in corporation’s coffers then we have seen in decades. Instead of hiring full time employees, corporations are pushing more overtime and temporary staffing.
We feel this sideways market will continue until the elections this November. After the elections investors and corporations will see the direction our government is headed. As referenced in the chart below, if you look at stock market returns by political party control, the healthiest situation would be to have a Republican Senate and House and a Democratic President. Why? Because the stalemate environment reduces Congressional spending giving corporations and investors more incentive to plan and spend.
Source: U.S. House of Representatives, U.S. Senate, Gallup Inc., FactSet, J.P. Morgan Asset Management. *In roll call votes where the majority in one party voted the opposite way to the majority in the other. Data compiled by professor Keith T. Poole and Howard Rosenthal available at www.voteview.com. Stock market returns are price only and calculated from election date to election date. Data are as of 6/30/10.
We feel that if a shift to more Republican or balanced control in congress occurs, recovery back to the highs of 2007 could resume on schedule and occur in 2 to 3 years. If little shift occurs and we continue with more dominant control by the Democrats, then the recovery could take 4 to 5 years.
To deal with these sideways markets we are making some changes to our portfolios which are designed to hedge your assets should the markets go down while also allowing your assets to gather as much of the up side as possible. This way no matter how many years the recovery takes, volatility can be better handled while government policies and corporate spending policies change. Please contact us if we have not contacted you for our recommendations.
Interest Rates – a Huge Issue
Another concern we see are rising interest rates. They have been declining for the last 30 years. They are about as low as they can go and have only one direction to move and that is up. As interest rates go up, bond prices go down. In 1999 & 2000 tons of money was flowing into tech companies which caused a huge bubble. We are seeing the same thing now, except fear is driving the money into bonds. When interest rates start rising, many bond holders are going to be drastically affected.
We have been doing a tremendous amount of research and looking at historical numbers on how to properly position bonds to handle rising rate changes. For now, you want to be evenly diversified in all the bond sectors so you can potentially take advantage of the best interest rates out there, but once rates start going up we will give you more direction. We will watch the yield curve closely and focus you on the sweat spots that could be less likely to be affected by interest rate increases.
Foreign GDP Helping Our Economy
AllianceBernstein has forecasted that Emerging Countries’ (China, India, Brazil, Argentina and etc.) Gross Domestic Product (GDP) is forecasted to be 7.6 in 2010 and 6.0 in 2011 which is almost twice what developed countries will produce. There have been huge increases in middle income earners in these foreign countries who are buying many American products for the first time. That flow of money is going to stimulate our economy and has been overlooked by many. It takes time for the flow of money to integrate into the system, but it is coming.
Year End Projections
We believe that if elections create a stalemate in Congress and that no major lame duck legislation is pushed through during the last two months of the year that we could see the markets end higher for the year. We are expecting more sideway movements until then with a slow steady rise in the markets afterwards. The profitability of most US publicly traded companies is growing steadily. This will insulate the markets from large downward corrections. Inflation is going to remain low for a few more years. Unemployment will continue to decline around 1% a year. But, as a nation we have to start facing some greater challenges: funding Obama Care, Social Security, Medicare and Medicaid. Our children’s future tax burdens do not look well, but we believe as a nation we will figure this out also.
Raymond James Investment Strategy Quarterly
Raymond James has a huge powerhouse of economic and market resources for us. They recently started to organize all the various departments, economists and research data into one quarterly newsletter. If you would like to dive deeper into some good research and economic data we recommend reading this newsletter. It is available to you online at http://www.marvinellis.com/deliver/markets.php.
Approval #: C10-19734. If you would like to stop receiving this newsletter please contact our office at 801-295-7373. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any options are those of Ellis Financial Group and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.
Tags: Advisor Commentary, Interest Rates, Market Outlook, Our Recommendations, Politics
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