As Published in the Summer 2012 Edition of NJ Lifestyle
It is almost futile to attempt to time the markets or consistently predict with any high level accuracy what will unfold in the future, especially with so many major unresolved and pending issues currently confronting investors. As advisors, we strive to remain objective. We weigh the known data and information in order to position our clients and give them the best chance of success, while also reducing, as much as possible, the potential downside risk related to any known or unknown fat tail events. With the first half of 2012 in the rear-view mirror, it is a good time to evaluate and reassess the strengths and weaknesses in the Global Economy. This article will attempt to identify and differentiate between the Good, the Not-So-Bad, and the downright Ugly.
U.S. Corporate Sector — Companies in the U.S. have much healthier balance sheets than they did in 2008, with more than $2 trillion in cash. Corporate debt has become more manageable with lower interest rates and longer maturities. Earnings growth has certainly slowed, but most analysts still see earnings staying flat to slightly positive.
Global Interest Rates — Central banks in the developed nations remain extremely accommodative as we sit at or near all-time lows. U.S. Inflation — General price levels are rising modestly, while prices for many industrial inputs have fallen, including oil. As long as inflation remains tame, we will not see a return to normal monetary policy.
Not So Bad
U.S. Consumer — Despite the deleveraging that the American consumer has done since 2008, spending has been resilient. The drop in prices at the gas pump that have occurred over the last few months have helped as well.
Credit — Although commercial loans are on the rise and interest rates are near all time lows, tougher underwriting and reservations about taking on additional debt amidst the current uncertainty have led to weak demand.
Housing — Prices in many areas of the U.S. housing market are stabilizing. This will hopefully spur some economic activity after several years of being a contracting force on the economy.
Europe — Every time Europe seems to be getting better, we have a setback, whether in Greece, Spain, or now Italy. The problems in Europe are likely to be with us for years. Our best outcome may be a tighter fiscal union eventually, but we may have more pain before that occurs, as it is evident that vital economic stimulus is needed.
U.S. Politics — Extreme partisanship and Congressional dysfunction remain a huge threat as the U.S. heads toward the fast approaching Presidential election and the impending “Fiscal Cliff” at year’s end. The long-term budgetary solutions needed for the tax code and the entitlement programs will most likely be extended or “kicked down the road” again. Where the markets and the economy end up by year end will ultimately depend whether world economies can “weather” continuing weakness in Europe, and will also greatly hinge on the ability of U.S. corporations to continue to create jobs and grow profits, if even at an anemic pace. Additionally, how well Congress confronts and navigates the many expiring tax code and budget sequestration issues is vital to investor confidence, especially during the short legislation window that will exist after the November Presidential election.