By Darren Nyce
Senior Research Analyst, Castle Investment Advisors®, LLC
In the Nyce home, we have recently taken a step to block out some unwanted noise. We have purchased a Sleep Mate. This wonderful product creates steady soothing sounds that mask my snoring and heavy breathing allowing Mrs. Nyce a restful night’s sleep and allowing me to awaken with far fewer bruises on my ribs.
Sometimes I wish I had a Sleep Mate for my Twitter account or for CNBC. Ours is a complex global society with a myriad of moving parts; determining the difference between what’s important and what is just noise is often difficult. Every day it seems there is another economic report or news headline that impacts investment portfolios and financial plans. Here were some topics gleaned from the headlines just during the last 2 weeks of July:
DEBTCEILING UNEMPLOYMENT HOUSINGSTARTS EXISTINGHOMESTARTS EARNINGS IPOs LEADINGINDICATORS DOWNGRADEDUSDEBT SATURDAYMAILDELIVERY GREECE BOEHNER GEITHNER FEDERALRESERVE GOLDPRICES OILPRICES CONSUMERCONFIDENCE HOMEPRICES PRESIDENTOBAMA FORECASTS JOBLESSCLAIMS MARKETDROPS DEFAULT CREDITRATING VETO
This information overload can be overwhelming, especially when the stock market is going down. We at Castle Investment Advisors® strive to stay informed on as much as possible, and then take the themes that emerge from that information to help clients reach their financial goals. So after blocking out the noise, here are 5 key elements that deserve your attention.
1. Government’s Role
There is a growing frustration on behalf of individuals and corporations with the leadership in Washington; this includes Congress, the Federal Reserve, and the President. While the recent threat of a government shutdown was in the end avoided, there remains significant uncertainty regarding the sustainability of current debt levels and as a result there will continue to be much debate about what tax policy will be going forward.
For its part, the Federal Reserve sighting “significant downside risks to the economic outlook” announced its intention to keep short-term rates near zero until 2013. In addition the central bank will buy $400 billion of long-term Treasuries in an effort to lower long-term interest rates and spur lending and economic growth. They will do this while simultaneously selling an equal amount of short term Treasuries in a process called “Operation Twist.”
These actions combined with investors seeking safety in a falling stock market; have caused Treasury yields to fall to levels not seen since the 1940s. Here’s a graph that shows the yield curve at the end of this quarter compared with what it looked like at the end of June. (All graphs in this letter have been provided by American Century Investments.)
While trending lower from the post recession peak of 10.1%, the unemployment rate has remained stubbornly high, most recently at 9.1%. This compares with the 40 year historical average of 6.4%.
Though corporations in general have strong balance sheets and historically high levels of cash, the uncertainty mentioned earlier is hindering businesses from committing that cash to hire new workers. This indicator, along with #3 will be fundamental to determining when real economic recovery is underway.
August saw an uptick in existing home sales, but, overall sales are still extremely low by historical standards. At the current pace, it would take 8.5 months to sell all existing homes on the market. The median sales price remains 26.9% below its peak in July 2006.
4. Financial Crisis in Europe
It would appear that some measure of default in Greece is inevitable; combine this with plenty of instability in several other nearby countries and you’ve got a lot of people wondering what will be the outcome of this volatile situation. So far, the can continues to be kicked down the road by the European Union. The big risk is that there is no solution in Europe. The concern is that a severe credit crisis could spread worldwide.
5. Recession Risks
Here is how the major indexes performed during this past quarter:
|Index||Q3 2011||1 year|
|Dow Jones Industrials||-11.49%||13.83%|
|Russell 2000 (Smaller Companies)||-21.87%||-3.53%|
|30 year Treasury Bond||31.07%||19.89%|
|U. S. Aggregate Bond||3.82%||5.26%|
|Investment Grade Municipals||3.81%||4.18%|
The most commonly used measure of the health of the overall economy is the Gross Domestic Product (GDP). As you can see by the chart at the top of the next page that while GDP remains positive in 2011, it has slowed significantly since 2010.
Several economists have said that the market has priced in about a 50/50 chance of entering another recession in the near future. However, normally before a recession, you would expect to see some of the following signs of an economy about to falter:
- Low savings rate
- Oppressive household debt burdens
- Banks aggressively overextending loans
- Too much borrowing
- Overstaffed companies
- Companies with too much inventory
- Businesses overinvesting
- Fed tightening rates too aggressively
- Housing prices too high
- Low demand for durable goods
- Bond yields steadily rising
Since we are NOT currently experiencing any of these events, this leads us to believe that the likelihood of a near recession is not as likely as a slow growth environment similar to what we have been recently experiencing.
Thanks for letting us partner with you along your financial journey. We appreciate the trust you have placed in our firm. Here’s to a great finish to 2011!
Castle Investment Advisors®, LLC Investment Team
Tax, legal, and estate planning advice contained in this article is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation.
This article was prepared for informational purposes only and does not constitute an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Information presented does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information regarding products and services. It should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.
Any strategy discussed herein may not be suitable for all investors. Before implementing any strategy, investors should confer with their financial advisor. No current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels.