April 2011
In this issue:
Racing Update: “Angels Foundation 5k”
With my ankle wrapped in an ace bandage, I ran …
Help Wanted: “Administrative Position”
We are looking for another part-time …
By Ralph Bender, MBA
For the past month or so, in spite of a nagging right ankle and Achilles tendon, I’ve been training for my next marathon. Deep water running allows me to work all the right muscles without putting any strain on that bothersome ankle. When we want to accomplish something, we usually find a way to get the job done, in spite of obstacles thrown into our path.
The 2nd Quarter of 2011 appears poised to continue where the first ended, with the US economy returning to a more normal state along with most of the developed economies. The emerging (or developing) economies are showing the first signs of overheating. Washington politicians are reaching compromised solutions, which turn out to be mostly smoke and mirrors. The media continues to create the maximum anxiety reporting on events from around the world.
The stock market responded to all the turmoil, including North Africa, Japan and the near closing of the Federal Government pretty much as expected. Uncertainty isn’t the market’s friend in the short run, but in the long run, it is mostly interested in company profits, employment, inflation and government policies. And, for the moment, all of these issues appear to be in good places.
- S&P 500 companies’ after-tax profits as a percentage of GDP are 40% above their 50 year average.
- Private employment has re-created 1.8 Million jobs, of the 8.8 Million lost during the recession.
- Monetary policy (the FED) is just slightly expansionary, given the low US core inflation rate.
It is true that there are inflationary pressures building and being realized around the world, especially in the most rapidly expanding economies of Russia, India & Argentina. But here in the USA, core inflation (which excludes food and energy) is currently held in check by the depressed housing market. Housing comprises about 40% of the core inflation index, and it’s calculated by an interesting formula that includes homes owned as well as rental prices.
Real estate prices haven’t completely bottomed, but there is a lot of activity in the residential real estate market. People who lost homes in the recession are beginning to move out of shared housing arrangements and renting homes, as evidenced by firming rental rates.
The quarterly earnings reporting season is underway. I expect analysts’ predictions to be more optimistic and therefore fewer positive earnings surprises and more downside surprises. Expect some “choppiness” if this situation turns into an excess of negativity.
Deep water running is not the same as running. All the work the body does is based on the water’s resistance. It’s very difficult for me to gauge my body’s level of fitness for this upcoming race. Likewise, the average consumer isn’t plugged into the important numbers related to the economic expansion, but forms his or her opinion based on things like the sensationalized reporting of the media, their own experiences with gasoline prices, or their associates that haven’t yet found a new job. However bad those empirical evidences may be, they must be taken in the context of the aggregate when gauging the strength of the economy.
Consequently, consumer confidence remains considerably lower than might be expected 22 months into an expansion. The low confidence probably helps the unemployment numbers, as it keeps the people who’ve given up on finding work off the roles. As I mentioned earlier this year, rising gasoline prices have a disproportionate impact on confidence.
The federal government avoided a shutdown, and the negotiations dominated the airwaves for about a week. Clearly, the threat of deflation is behind us and by year-end the FED will likely begin increasing short-term interest rates and tightening monetary policy. Expect a lot of talk about this “change of course”.
Prosperity, whether in sports or business, is usually the result of a lot of repetitive efforts. I received this “tweet”: “we tend to forget that all good things take time” attributed to the great Basketball coach John Wooden. The markets and the economy are in pretty good shape, because we usually find a way to make money regardless of the problems we face.
As always, please feel free to call or email me with any questions or concerns.
Sources: Wall Street Journal; Bureau Economic Analysis (BEA); JP Morgan Asset Management