May 30, 2014
Dear Valued Investor,
With Memorial Day behind us, school is ending in many parts
of the nation and summer vacation destinations are a hot topic of conversation.
But we were recently reminded of the significant impact the unusually cold and snowy
winter of 2013–14 had on the U.S. economy. The Bureau of Economic Analysis of
the U.S. Department of Commerce released revised figures on economic growth for
the first quarter of 2014 as measured by gross domestic product (GDP). The GDP
data are closely watched, as GDP is the broadest measure of the nation’s
economic output. The pace of GDP growth is a critical driver of corporate
earnings, which, in turn, are the key driver of stock market performance.
The GDP
data revealed the economy contracted at an annualized 1% pace in the first
quarter, just the second time since the end of the Great Recession in mid-2009
that the economy contracted. Could the first quarter GDP report be a harbinger
of another wrenching recession? We don’t think the weather-related economic
weakness is the start of another recession or even a slowdown in growth. We
continue to expect that economic growth will rebound and expand 3.0% in all of
2014.* In fact, the return to a more normal weather pattern nationwide has
already led to a sharp snapback in economic activity. The U.S. economic data
released thus far for April and May 2014 suggest that economic growth will
accelerate in the second quarter to well above the economy’s long-term average
growth rate after a weather-induced slowdown in growth in the first quarter of
2014.
Importantly,
many of the other indicators that can provide an early warning of recession are
not signaling a downturn in the economy. The Index of Leading Economic
Indicators (LEI)—compiled by the Conference Board—a private sector think tank—is
comprised of 10 indicators and designed to predict the future path of the
economy, with a lead time of between six and 12 months. The year-over-year
increase in the LEI in April 2014 was 5.9%. Since 1960—652 months, or 54 years
and four months—the year-over-year increase in the LEI has been at least 5.9%
in 211 months. Not surprisingly, the U.S. economy was not in recession in any
of those 211 months. Thus, it is highly unlikely that the economy is in a
recession today, despite the below zero reading on real GDP in the first
quarter of 2014. Looking out 12 months after the LEI was up 5.9% or more, the
economy was in recession in just nine of the 211 months, or 4% of the time.
On
balance then, we would agree with the LEI indicator that the risk of recession
in the next 12 month is negligible at 4%, but not zero. However, a dramatic
deterioration of the fiscal and financial situation in Europe, a fiscal or
monetary policy mistake in the United States or abroad, or an exogenous event
(a major terror attack, natural disaster, etc.), among other events, may cause
us to change our view that the odds of a recession in the United States remain
low. But for now, based on the LEI, it looks like we are still in the middle of
the economic cycle that began in mid-2009.
As we look forward to enjoying the summer sun, we continue
to believe the foundation is in place for you to make further progress toward
achieving your financial goals in 2014. As always, if you have questions, I
encourage you to contact me.
Sincerely,
Christopher Gerber, CFA
Phone: (952)230-1340
Fax: (866) 734-4311
Private Wealth Counsel of
Minnesota, LLC
8000 78th Street West
Suite 150
Edina, MN 55439
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Private Wealth Counsel of Minnesota, LLC
does not accept buy, sell or cancel order by e-mail, or any instructions by
e-mail that would require your signature. Information contained in this
communication is not considered an official record of your account and does not
supersede normal trade confirmations or statements. Any information
provided has been prepared from sources believed to be reliable but is not
guaranteed, does not represent all available data necessary for making investment
decisions, and is for informational purposes only.
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Christopher Gerber,
LPL Financial, and Private Wealth Counsel of Minnesota, LLC, do not offer tax
or legal advice. We recommend that you seek
qualified tax and legal counsel before making tax and legal decisions.
Securities offered through LPL Financial,
Member FINRA/SIPC
* As noted in the Outlook
2014: The Investor's Almanac, LPL Financial Research expects GDP to
accelerate from the 2% pace of recent years to 3% in 2014. Since 2011,
government spending subtracted about 0.5% each year from GDP growth. Government
spending should be less of a drag on growth which would result in +1% increase
for 2014.
IMPORTANT DISCLOSURES
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. All performance reference is historical and is no guarantee of future.
This research material has been prepared by LPL Financial.
The economic forecasts set forth may not develop as predicted.
Securities offered through LPL Financial. Member FINRA/SIPC.
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