June 3, 2011: Market Update
State of the Economy: Mid-Year Review
If you were hoping that last week’s economic data was an anomaly, you would have been disappointed by the news this week. Two weeks does not make a trend, but perhaps a couple of months do. The shock this week was a very poor jobs report which had the optimists scratching their heads and the pessimists questioning their optimism. The market tried to shrug off the news but in the end it finished lower for the week.
The silver lining, as mentioned last week, is that as the economy deteriorates, it is more likely that the Federal Reserve will be forced into further quantitative easing. While quantitative easing is widely seen as a failure in curing the ailing economy (particularly labor and housing); it has been very successful at inflating financial asset and pumping up commodity prices. We’re neither sure what form the stimulus will take nor when it will happen, but with each passing week it appears more likely.
Let’s not forget that corporations are sitting on huge piles of money. Some of it is parked overseas where it will probably remain, short of an income repatriation tax holiday. However, a lot of it is right here in the United States and is waiting for the right opportunity to buy a competitor, expand into new a market, repurchase stock, pay down debt, expand infrastructure or put into research and development. Earnings trends remain positive and productivity is higher. While inflation pressure has begun to work its way into materials costs, it still has not created an issue for most industries. Companies are in better shape today then they have been in a long time.
What’s ailing is middle-class America. We learned this week that housing prices fell another 4.2% in the first quarter of 2011, bringing them down to mid-2002 levels. To a large extent this drop is driven by the large number of foreclosures than continue to wind their way through the system. However, an even more sobering number was that the unemployment rate headed higher again for the second month in a row. We learned today that the unemployment rate is now 9.1% and that only 54,000 jobs were created last month (there are 8.5 million people unemployed). Consumption makes up 70% of our Gross Domestic Product (GDP) and to the extent that people remain unemployed, worried about their jobs, or unable to make their house payments, the economy will continue to struggle.
We’re in difficult times. We’ve been navigating these waters with financially strong companies who have excellent growth opportunities. We’re also focused on companies that have strong international sales and fixed income with an international component. Eventually, this cycle will turn around and the market will head higher. Until then, we remain positioned to weather both the good and bad that undoubtedly lies ahead.
While the news may be less than rosy at the moment, rest assured that things will get better. After all, the world didn’t end on May 21st right?
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