Q4 2010 Newsletter

How do we sum up a year that in many ways was so unique?  On one hand, European debt issues, struggling housing markets and high unemployment were profound.  On the other hand, we saw record corporate profits and strong emerging market growth.  While we tended to focus on the various stressors in the global economy, the trend of rising global productivity (including the U.S.) was often overlooked.  We anticipate the global economy will potentially remain in a sustained expansionary state for the next several years.  Despite possible bumps along the way, we believe we have moved beyond the concern of a major economic relapse.

The troubles in Europe and its peripheral countries are far from over.  While Germany may be growing at the fastest pace since WWII, its neighbors are languishing.  Furthermore, the debt crisis in Ireland and Greece threaten the very stability of Europe.  The big surprise this year could be a more unified strategy to address the slowly spreading debt problems plaguing the European Union.

As for the U.S., the private sector continues to expand despite weak job creation. In fact, we could see earnings growth of U.S. companies in the 9%-10% range in 2011.  The six-hundred pound gorilla in the room is the rising U.S. debt level.  A decision to deal with short-term cyclical problems is delaying addressing the multiple long-term structural issues like the debt level.  We believe the U.S. and global growth will win over fiscal issues…. for now.

Emerging markets are still on pace for strong economic growth.  In fact, their concerns are that too fast a pace of growth could lead to inflation.  The solution for many will be tighter monetary policy as already seen in China.  Yet, with the U.S. economy in its nascent recovery and the European economy struggling to find footing, the emerging markets remain a beacon of hope.  We believe it’s better to face the risk of inflation in the emerging markets than the risk of deflation in Europe.

Looking forward, one area of concern is the potential for inflation and higher interest rates.  Both could hamper the economic recovery.  While these concerns are legitimate, we do not think we are at an inflationary precipice despite pricing pressure in areas such as food and oil.  In addition, we believe real economic growth will be the catalyst to push interest rates moderately higher.

In summary, it appears that 2010 was the year that we turned the “economic corner”.  We expect the trending growth to remain positive and believe the year will finish higher than where it started.  We look forward to a possibly volatile yet successful 2011.

As always, we value your trust.  If you have any questions or would like to discuss anything further, please give us a call.

Best Regards,
Marc Henn CFP , President