Hi everyone. Welcome to the February 2013 newsletter. Let’s review the market activity for February and talk a little about the economy.
Looking back at the markets for February, we saw a gain in the S&P 500 of just over 1%. International markets were down by almost 1% and our bond market was down as yields have started to move higher. Although a 1% gain in our broad market may seem like a letdown after a 5% gain in January, it does continue the momentum as the markets move forward. A lot of the time, you’ll see some profit taking and a pullback just after such a strong month and we are fortunate to have avoided that even with the deadline of the Sequestration looming at month end.
So how is it, or why is it, that the market is moving ahead even in the face of such dire political calamities? It appears the investing masses are shrugging off these political dramas and are not reacting to them. The world was coming to an end in August 2011 when the debt ceiling was raised and US debt was downgraded; the world was coming to an end when the Fiscal Cliff was looming Jan. 1st; and again at the deadline for the Sequestration on Feb 28th. Obviously, $16 Trillion of debt, and growing daily, is a serious issue. The media isn’t completely blowing this out of proportion. But, it’s almost like they’ve cried wolf too many times and everything didn’t come to an immediate halt. Social Security checks weren’t stopped, our military wasn’t sent home without pay and, to all outside appearances, our world looked remarkably the same as it did before these extraordinary political milestones.
I attribute all of this to improved consumer sentiment. We are just in a better mood about the economy. No, it’s not where we would like it to be, but I think we all feel like the worst is over in the housing market (everybody feels a little better now that our home values are increasing instead of falling) and, because of our improved mood, we shrug off a bad economic report where, when we’re in a fearful mood, we would seek them out and focus intently on bad news to confirm our lousy disposition. As we see the continued fumbling of the fiscal situation politically, we have learned not to overreact and instead focus on some of the positive economic trends.
And there are some positive trends. I recently attended a presentation from one of the mutual fund families that highlighted several bright areas. Of course, I’m always cautious about the information they provide us since they have a tremendous incentive to always look on the bright side. You’ll never hear them say, “Everything is turning to road apples and you should sell out of all of our funds.” Understand that they make money from you sitting in those funds at all times, so under no circumstances will that ever happen. Even still, some of their points were very interesting. There are three areas that should contribute to economic growth: housing, energy production and, believe it or not, manufacturing. Homebuilder sentiment has greatly improved, which usually points to increases in activity. Even with a slight recovery, we are still at roughly half the 40 year average for housing starts. Get back to the average and this could add 3 million jobs. Crude oil rig counts have exploded from under 200 to over 1400 in the last 10 years and last year was the first time in 49 years that we were a net exporter of oil. Our natural gas costs are one fifth of Japans, Korea and China and one third of Germany’s so we should add 3.5 million jobs expanding those efforts. Lower energy costs, and higher worldwide labor costs, helped reverse another 40+ year trend: for the first time in almost 50 years, we saw an increase in US manufacturing jobs by a half million new jobs in the last 18 months. Coleman, Masterlock, Stanley, Starbucks and Whirlpool have all announced plans to bring jobs back from China and Volkswagen will move production of their Passat model to Tennessee, saving an estimated $8000 per $28000 car. This could add another 2-3 million jobs over the next 10 years.
Not to say that everything is fine and that all our problems are behind us, but should the economy continue to recover, it could go a long way to reducing the urgency of our political leaders to make drastic changes to the federal budget. For example, if we increase GDP growth from 2% per year to 4% (which is not an easy task), we would have a balanced budget even with our current spending levels and tax structure. Therefore, we are not yet past the point of no return in being able to pay off our national debt. Yes, we are getting closer hour by hour, day by day, but, depending on the growth of the economy, no one can predict how much longer we can go down this path before we reach that point where we will not be able to reverse the situation. The scariest part of this equation is that should the economy not improve to repair the problem, the only other option is for our politicians to do it and, apparently, they’re too busy playing politics to actually solve any problems.
As far as the portfolios go, we remain fully invested on the equity side and expect the markets to continue this climb for several more months, not withstanding some major problems flaring up. That’s all I have for this month. Thanks for listening. Please feel free to share this to anyone who you think it might help. Talk to you next month.