The landscape is growing increasingly murky as we approach year-end
Briefly looking back at 2010, we saw much of the economic recovery peaking in May. Since then, most indicators have hit a plateau or are growing more slowly than expected. While we have seen bright spots in seasonal retail sales and consumer spending, merchants have heavily discounted items in order to spur those sales.
With stubbornly high unemployment numbers, little expected salary growth it is hard to believe that consumers will be able to continue the current pace of spending into 2011. Additionally, if merchants must heavily discount their goods in order to entice consumers to spend, this too will ultimately erode corporate profits.
More Uncertainty Unveiled
Enter the Federal Reserve with their second program to purchase bonds in hopes of spurring growth and driving down interest rates. As of this writing, it appears that the policy may have far less impact than the Fed, or their critics thought.
Most economists (and Lowe Wealth Advisors) expected a weaker dollar and inflationary pressures from the policy. While it is far too early to determine if the Fed’s policy will lead to growth, inflation and a falling dollar, at this time the impact appears to be muted.
A great deal of the money the Fed has created is sitting in banks and businesses are continuing to stockpile cash. The money is not flowing into the economy in a way that would stimulate growth.
Europe has remained a thorn in the side of global economic recovery and it is a problem that simply will not go away. Ireland, Spain, Portugal all continue to have issues, while other EU members, most notably Germany, resist the steps to bail out the troubled nations.
If that were not enough, another wave hit this week with the news that an extension of the current tax law is imminent. While this extension could spur growth, it is also possible that it could work against the Fed’s goal of lowering rates.
Our opinion is that extending the current tax laws could have a far greater positive impact in the short term on the economy and financial markets than the Fed’s policies. Extending the current law could also avert a wave of selling in the stock markets at year-end by investors eager to lock in unrealized capital gains at potentially lower rates. This is another potential positive aspect of such an extension.
If this were not enough uncertainty for you, enter China. The Chinese have been aggressively attempting to slow their economy and inflation. Today, their banking system took action for the third time this month (source Wall Street Journal) in order to slow growth.
It is our opinion that China has been one of the major drivers of the increase in commodity and natural resource prices over the past year. In our view, any slowing of their economy could cause reduced demand for commodities and a possible significant correction in this sector.
Given the precarious nature of the economic recovery and the continued high levels of unemployment, Lowe Wealth Advisors has for much of 2010 taken a stance tilted toward potential portfolio preservation. We have been conservative knowing full well that if the market jumped unexpectedly, we would lag the benchmarks in the near term.
Indeed, the stock markets increased this fall and as predicted we expect to lag many benchmarks in the short term. It remains our belief that the recent increases in the stock market are an anomaly and absent a significant factor such as real improvement in unemployment, may not be sustainable. Naturally, Lowe Wealth Advisors does not like lagging market benchmarks, however we would rather err on the side of caution than err on the side of taking on too much risk.
We know the places we want to be, but are waiting for the right opportunity to invest. In many allocations we want to be in China and emerging markets and we may want to increase commodity exposure. However, at Lowe Wealth Advisors we are not speculators and we do not feel that based on the above risks we have outlined taking risky positions to try to ride some short term gains is prudent.
Our cash is sitting ready for opportunity and we will allocate (in our discretionary actively managed portfolios only) when we believe the time is appropriate. It is possible that in some allocations we may make purchases in the coming week in the areas of Financials, Technology, Materials and some potential money market alternatives.
Looking Toward 2011
As we look toward 2011, we see no immediate reduction in the amount of uncertainty. In fact, we foresee increasing complexity, volatility and conflicting economic signals and polices ever growing.
Based on our view of the environment, Lowe Wealth Advisors believes that continuing to invest in research is critical. We are currently reviewing proposals from several research firms and expect to make an announcement within the next two weeks regarding the hiring of an additional firm.
This additional research firm will be in addition and enhancement to our existing research team of Morris Segall and Anirban Basu.
To listen to the conference call click here: November 11 Conference Call With Morris Segall
Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us. Generally accounts less than $150,000 are not actively managed. An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.
- Not all portfolios are actively managed. If you have a question about how your account is being managed please contact us.
- No diversification can completely protect against market risk or other risk factors with investing. A diversified portfolio could still lose money.
- An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.
Foreign investing carries additional risk such as currency risk, political risk and different accounting standards.
*Lowe Wealth Advisors is a registered investment advisor.