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Economic Recovery Expected to Creep Ahead in 2012 – Jan 2012

The U.S. economy appears to be gaining momentum coming out of a disappointing 2011. Real GDP is expected to show a better than 3% annualized growth rate in the fourth quarter, which is up from roughly 2% in the third quarter, and considerably stronger than the first half of 2011 when growth was closer to 1%. Additionally, growth estimates for 2012 are starting to be revised upward, and are now in the 2.5%-3.0% range. Reflecting the stronger economy, job growth is also starting to revive. In December, private payrolls grew by more than 200,000, and the unemployment rate has dropped for the fourth consecutive month, falling to 8.5%. For the year, companies added 1.6 million employees, the best year of job gains since 2006. One surprising area of strength is manufacturing, which has been steadily adding jobs for the last two years. Before the gains of the last two years, manufacturing sector payrolls shrank in every year going back to 1997.

Lest we sound too optimistic, economic problems still abound. At this point, aggregate demand is still too weak to justify a strong resurgence of hiring. While it is likely that job growth will strengthen in the first half of 2012, the improvement will be gradual as uncertainties continue to undermine business confidence. Put another way, we expect firms will typically continue to hire only on an as-needed basis, and not make bold hiring moves in an attempt to spur company growth. As a result, the unemployment rate is expected to remain stubbornly above 8% through 2012.

Good news for global financial markets – Nov 30, 2011

Global financial markets got some welcome, and much-needed, good news today.

 The U.S. Federal Reserve, European Central Bank, Bank of England, and the central banks of Japan, Canada, and Switzerland have joined forces in an effort to ease the financial strain caused by the European debt crisis.  In a joint statement, the central banks stated, “The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.”

 In other words, central banks from around the world are stepping forward to ensure that banks have access to credit, so that the European debt crisis doesn’t snowball into a global credit freeze like the one experienced during the financial crisis of 2008.  Before the announcement, banks were becoming unwilling to lend to one another due to the uncertainty around which banks were most at risk to potentially bad sovereign debt.  Today’s announcement goes a long way towards restoring the confidence of the global banking system and sends a clear signal that central banks from around the world are prepared to take steps to prevent the European debt crisis from becoming a global contagion. 

Read More:

http://www.nytimes.com/2011/12/01/business/central-banks-move-together-to-ease-debt-crisis.html?hp

http://www.npr.org/2011/11/30/142940118/worlds-central-banks-act-to-ease-market-strains

Bill Miller to quit as Legg Mason fund manager – Nov 17, 2011

More evidence that past stock picking success is not predictive of future success. This legendary stock picker is retiring after dramatically trailing the market four of the last five years.

By Chris Isidore @ CNN Money Markets, November 17, 2011

Bill Miller, portfolio manager who beat the S&P for 15 straight years will remain Legg Mason chairman, but in April he will give up his role of managing Value Trust that made him famous.

Read More:   http://money.cnn.com/2011/11/17/markets/bill_miller/index.htm

The Hazards of Confidence – Oct 19, 2011

Don’t Blink:  The Hazards of Confidence
by Daniel Kahneman:  Professor emeritus at Princeton, Nobel Prize laureate in Economics
Published in the New York Times October 19, 2011

This is an intriguing article about what Kahneman calls the “illusion of skill”—the ingrained belief that we have the ability to accurately predict an outcome, despite overwhelming evidence to the contrary. 

According to Kahneman, “people come up with coherent stories and confident predictions even when they know little or nothing. Overconfidence arises because people are often blind to their own blindness.”

The article describes how this is painfully obvious when it comes to picking stocks, where individual investors have a strong tendency to shoot themselves in the foot, and even professional managers consistently underperform the market.  As Kahneman says:  “overconfident professionals sincerely believe they have expertise….You will have to struggle to remind yourself that they may be in the grip of an illusion.”

Kahneman’s “over confidence” assumption resonates with us at CCM and this is one of many compelling reasons why we utilize passive investments such as index and exchange – traded funds in client portfolios.

Click the link below to read the article:

http://www.nytimes.com/2011/10/23/magazine/dont-blink-the-hazards-of-confidence.html?pagewanted=1&_r=1&emc=eta1

Stock market heads lower again – Sep 22, 2011

The market suffered another broad selloff today continuing the violent back-and-forth pattern that has characterized the last several weeks.  Over the last two trading sessions, the Dow has dropped more than 6%, from roughly 11,500 earlier this week, to below 10,800 today.

The market’s steep decline was sparked by the Federal Reserve’s announcement yesterday that it would begin further quantitative easing measures aimed at lowering long-term interest rates to stimulate the flagging U.S. economy.  This move by The Fed was widely anticipated, as dour economic conditions are well known.  But in spite of being widely expected, the market sold off sharply in response.

The Fed’s actions and commentary, coupled with the expectation that further Fed action will soon be necessary, left little hope the economy can regain momentum in the near-term.  Consumer and business sentiment has collapsed.  Hiring is at a standstill.  Economic fears are once again gripping the country, and spending and growth are almost certain to suffer.  In other words, the U.S. and much of the developed world may have already entered into a new recession.

Fear is high, be greedy

During periods such as this, when all hope seems lost, and the stock market looks like a fool’s bet, keeping a long-term perspective is paramount to investment success.  So to offer a bit of long-term perspective, please consider the following:

• The S&P 500 closed today at 1,130, the Dow at 10,734.  Both of these indices finished the day at nearly the same level they were just six weeks ago.  This is notable simply because the market’s dramatic drops over the last several weeks lend to the perception that stocks just keep going down.  The reality is that the market has been making dramatic moves both up and down, with the net effect of moving sideways within a jarring 8%-9% trading range.
• Even after the most recent plunge, the total return on the S&P 500 is actually slightly positive over the last twelve months.  The perception of the market’s performance is much worse, due largely to the fact that the market was strongly trending higher before the selloff.
• The Dow Industrial Average is up over 60% from its bottom reached in the spring of 2009.
• The yield on the 10-yr Treasury stands at roughly 1.7%.  Put another way, a “risk-free,” 10-year investment in government bonds will yield an investor a return of less than 2% per year.  Alternatively, the Dow Industrials offer a dividend yield of 2.5%, the S&P 500 yields slightly better than 2%, and real estate investment trusts (REITs) yield nearly 3.5%.  Put in this context, the “safety” of government bonds may not seem so safe.
• The S&P 500 is at the same level it was in 1998—thirteen years ago.  However, valuations today, compared against the heady days of the internet bull market, are compelling, especially when bonds are paying so little.

It’s said that bear markets end with a whimper, not a bang.  That is, investors become so disenchanted with eroding portfolio values, and the stream of negative economic news, that they simply give up hope and exit the market.  Unfortunately for investor’s net worth, this is most likely to happen near a market bottom when confidence is at its low point.

As advisors, we have had the unenviable experience of seeing this type of psychology work against investors during the bear markets of the last decade.  In a declining market, even the most sensible investment strategy can seem misguided and it is human nature to want to change something that doesn’t appear to be working.  We encourage our clients to avoid this temptation, just as we did during the dark days of the financial crisis.  We don’t think now is the time to sell.

We don’t have a crystal ball, nor would we claim the market cannot drop further, but we do hold a strong conviction that stocks are now favorably valued compared to other investment options and that long-term investors who are able to ride through these painful, but inevitable patches of volatility will be handsomely rewarded down the road.