By Marvin O. Ellis Sr. CLU
Branch Manager
We have seen a fair amount of volatility in the markets this year. The S&P started the year at 1115. It reached a peak of 1217 on April 19 and then hit its low for the year on July 2 when the S&P 500 reached 1022. The market reached a new high for the year on November 1 at 1226 but then retreated to 1180 on November 30.
For the quarter ending November 30, 2010 the S&P 500 was up 3.82% on a total return basis. For the year the S&P 500 is up 7.86% also on a total return basis. Although the market is up for the year it feels like we have been going sideways. And depending on your definition a good case can be made that we are in a sideways market because we have not experienced the robust upward movement the market makes in a normal recovery after a recession.
On September 20, the National Bureau of Economic Research (NBER) declared that the Great Recession that began in December 2007 ended a year ago in June 2009. We have been saying for over a year that the recession was over. It was nice that the NBER could finally confirm this. But for many, because of high unemployment, the sluggish economy, weakness in the housing markets, high levels of foreclosures, slower lending by the banking industry, and the high levels of state and US debt, the recession has not ended. These negatives cause fear and paralyze many from spending. Since we as consumers make up 70% of the economy when we don’t spend the economy suffers and the economy stays sluggish.
There are, however, many good signs that the economy is recovering even though slowly. 1. Christmas spending this year is up compared to last year. Consumers shopped in record numbers on Black Friday (the day after Thanksgiving) as well as on Cyber-Monday (the Monday following Thanksgiving).
2. In November GM had its Initial Public Offering (IPO) of its stock. GM had gone bankrupt in June of 2009 when the US Government had to bail them out with 50 Billion dollars. This IPO raised over 60 Billion which was 6 times what GM had expected. The stock was expected to open at 26 to 29 dollars a share. Instead it opened at $33. The Government’s 50% ownership in GM has shrunk and the US has received a good return on its investment. GM also report record sales in spite of decreasing the number of lines it has been building.
3. Bank lending standards have eased. Many individuals and corporations are finding it much easier to get loans which helps to stimulate the economy. Our Gross Domestic Product (GDP) is made up of how much we spend not how much we make. If we earn $100 and spend $95, only $95 counts toward GDP. If on the other hand we make $100 and borrow $10 and spend it all, $110 counts toward GDP.
4. Third quarter GDP numbers were revised up from 2% to 2 ½% which shows the economy is doing better than what was thought. Equipment and software spending by businesses rose greater than had first been reported.
5. Consumer spending rose 3% year over year.
6. The trailing four-week average of unemployment claims has fallen to its lowest level since August 2008 but all of these positives aren’t enough to suggest that we will have a meaningful drop in the unemployment rate.
7. Americans are paying down their debt. Debt service ratios as a % of Disposable personal income has fallen from a high of 14% in the 3 Quarter of 2007 to 11.9% at the end of September. Credit Card defaults continue to drop month after month. And Americans saving rates are the highest at 5.7% that they have been in close to 15 years. 
8. The November elections, as had been predicted, brought “change” across the country. Republicans were elected in record numbers as Governors, the House saw the majority shift from Democrats to Republicans, and the Democrats lost their “filibuster proof” status in the Senate. (See our 3rd quarter newsletter for why this is a good omen for the markets and the economy.)
9. And probably one of the biggest side effects that the tea party movement brought to Washington has been the pressure to extend the Bush Tax Cuts to everyone. This gives those who take the risks in business the incentives to hire, try new things and in the end get the economy moving faster in a positive direction. The owners of businesses all across the country have held off hiring because taking risks had become less desirable.
Fear is one of the great downward drivers in the markets. We always seem to have plenty of things to worry about or be afraid of. But lately it seems there are more than normal. Some of these include: geopolitical risk in the form of heightened conflict between North and South Korea, the European debt crisis that doesn’t seem to go away, policy tightening in China, high unemployment, an FBI-led investigation of insider trading, confusion over the implementation of the Fed’s quantitative easing, high levels of state and federal debt, fear of inflation domestically and abroad, Obama’s health care plan implementation and the weak housing markets.
But in spite of these negatives the markets have made nice gains this year. Have you noticed that the markets this year seem to shrug off these negatives compared to how they acted while our economy was going through a much softer patch just a few years ago?
Because of the fear that continues to linger from the deep recession we have all experienced, stock prices remain relative low based on Price/Earnings ratios which are in the low to mid teens. There is an excess of money in cash and extremely low paying bonds. As fear subsides with an improving economy those holding these low paying investments will lose their appetite for reduced risk and will seek better returns. As has happened in the past, when this shift takes place there will be a sudden rise in stock prices. You want to be positioned to take advantage of this rise in prices while attempting to reduce risk until it is clear this shift is underway. No one, including us, can tell when this shift will take place. Please call our office so we can help you position your assets according to your risk tolerance and time horizon.
We feel there is more risk to the upside movement in stock prices than there is to the down side. We have seen this in just the first few weeks in December.
Written for 4th Quarter 2010 Newsletter. Ad #C10-26626.
Bountiful, UT 84010
Markets Tumble on Signs of Weakening Global, U.S. Economies
Friday, August 5th, 2011Stocks fell sharply yesterday around the world, accelerating a widespread decline that began as the United States approached the August 2 deadline for averting default and then resumed with even more intensity after a brief rally when a debt/budget deal was reached in Washington. On Thursday, the Dow Jones Industrial Average fell 512.76, or 4.31%, while the broader S&P 500 dropped 60.27, or 4.78%, and the tech-oriented Nasdaq declined 136.68, or 5.67%.
At today’s close of 1,200.07, the S&P 500 has now slumped almost 12% from its April 29 closing high of 1,360.14, putting the market into what Wall Street considers a “correction” – generally defined as a pullback of 10% to 20% (declines greater than 20% are considered bear markets). For perspective, the market experienced a 16% correction in the summer of 2010 before rebounding after Fed Chairman Ben Bernanke announced the monetary stimulus policy widely referred to as QE2.
Although investors were cheered that the U.S. did not default, their focus quickly moved on to intensifying concerns that leaders both here and abroad have not done enough to address weakening economic growth both in the U.S. and globally. In the U.S., recent economic reports have raised fears that the U.S. economy might be in danger of tipping over into a recession. In Europe, a second major rescue package for Greece did not reassure investors, who have begun to focus on the debt problems confronting the much larger and more important economies of Italy and Spain. Investors there drove British stocks down 3.4%, while in Germany, the DAX index dropped 3.4% and in France, the CAC 40 closed down 3.9%.
Today’s action shows that investors are fleeing so-called “risk assets” such as stocks in favor of other asset classes they perceive as safer. Upcoming reports on U.S. employment and other economic trends will play a large role in determining whether investors can regain their confidence in the near-term.
For additional insights on the current economic situation, check out the most recent edition of Professionally Speaking featuring Raymond James Chief Economist Scott Browth, PH.D. You can access this audio presentation by visiting http://marvinellis.com/event.php?id=24&e=captainslog.
We want to assure you that we are following the markets closely and will of course continue to do so. While declines of this nature are obviously a matter of concern, it’s also very important not to overreact. If you have any concerns about the current investment climate, please give us a call.
Compliance approval M11-1672
Tags: 2011, Market Outlook
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