The Sidewinder
What
a confusing time. Thousands of headlines over six, yes SIX years. From Bernie
Madoff to a 2013 blockbuster stock year we have had most if not all we could
ask for. Throw in a war or two, some pension disasters, a few tax increases,
and a government that has indicated by its financial behavior that it is fairly
confused and you get, well, us. Whew! I need a breather, but not now. Let’s bring
some CLARITY to the picture.
If
you have been invested since year end 2007, and you measure the stock market by
the Dow Jones Industrial Average (Dow), you are barely above zero after
inflation. The Dow has been roughly trading sideways with a huge helping of
volatility. This is calculated using the Bureau of Labor Statistics (BLS) own
Consumer Price Index (CPI) calculator. It shows a TOTAL gain of 1¾% over the entire period, or 0.232%
annualized and compounded.
Volatility
has been beyond high. Measuring the intra year high to low is a “peak to trough
range”. Here, I use the S&P 500 for
some comparison. The yearly ranges are:
2008: 49%, 2009:
51%, 2010: 29%, 2011: 19%, 2012: 23%, 2013: 36%
Average: 35%
Is
it any wonder investors were a bit on edge? The volatility hit and just kept
coming. Hence the inflows into bonds to offset the volatility increased
dramatically. Bonds have price movement, too, to be fair. Volatility is
typically much lower, and they pay interest along the way. They have been a
nice diversifier in a very uncertain world.
This graph shows the
S&P Composite from the Schiller Fact Set. It has been a long, hard grind
for stock investors, the WOW factor of last year notwithstanding.
Source: Schiller Fact Set
Taking
away 2013 returns actually puts stock investors slightly behind 2007 after
adjusting for inflation five years later! Even with this, my opinion is that
going forward the positive outweighs the negative.
My Opinion on the Future
In
my opinion, the investment markets generally rest on these legs:
Inflation:
Fed would like to see some inflation. This would help it believe we have less
chance of deflation, a worse plight. Their forward guidance suggests slightly
rising interest rates in 2015. Labor earnings have started to increase. Average
hourly earnings growth is up 2.5% over 2013 (Bureau of Labor Statistics). Fed
likes this. It generally portends inflation and some inflation shows an
improving economy. I rate this positive.
Jobs:
Joblessness reports are better…kind of. Neither I nor Fed is convinced. Looking
harder at the numbers suggests that unemployment (U3) is down, but there are
actually fewer hours worked per employee. One estimate from Edward Lazear,
(Chairman of the President’s council of Economic Advisors 2006-9) suggests that
we are the equivalent of down about 100,000 jobs from last September. U3 will
never capture this statistic. I rate
this negative.
Earnings:
Record US earnings have been had for several quarters (S&P). Compared to
2007 earnings are slightly ahead after inflation. This is good news, especially
their consistency. Profit margin is
great. Average S&P 500 margin is 21.5% (S&P). Corporate cash remains
about 30% of current assets (S&P). This cash should eventually be better
used in productive endeavors as management gains more confidence. I rate this positive.
Overseas earnings are more volatile and less
predictable than those in the US. Parts of the world, including Europe are emerging
from their financial depths. This leads to opportunities. I rate this positive.
Growth:
US GDP growth is about 2.6% year over year. This is significantly below typical
recovery growth. Its composition shows lower than average consumer spending and
business investment. It is, however, positive. That’s a start. 2014 should have
less drag. Consumption is increasing. Corporate capacity utilization is up very
slightly from last year to 79.2% (Fed). We actually have a budget for the
remainder of the year. Congress is overspending its pocketbook, but at least we
now know by how much. Household net worth has actually peaked over that of 2007
even after inflation is factored in (BEA, Fed). Debt service as a percent of
after tax income has fallen from 13.5% to 10% (BEA, Fed). I rate this positive.
I think slow growth while climbing the wall of worry
is the order of the day. There is no question that there are several parts of
our economy remaining hobbled. Regulation is stifling growth and rightfully
causing management caution in business investing. Our medical delivery system
has been largely changed via federal government authority. Overall federal taxes have increased and we
expect state taxes will, too. Public pensions have been grossly mismanaged and
are a formidable expense. We are definitely not operating on all 8 cylinders.
But, we are operating better than much of the remainder of the world. My
experience tells me that value is relative, and we are relatively more valuable
than our competition around the world, but there is value elsewhere, too.
It is time to talk. It is time to act.
Chris
Securities offered through LPL Financial, member FINRA/SIPC.
The opinions voiced in this material are for general information only and are
not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly. The opinions
expressed in this material do not necessarily reflect the views of LPL
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