In this edition:
Market Update: Recovery Injuries
“Running a marathon puts tremendous stress on …”
“… I ran the Long Beach International City Bank Marathon …”
by Ralph Bender, MBA
Running a marathon puts tremendous stress on the human body, and getting ready for its next effort requires almost as much knowledge and care as the preparation and competition itself. Recovery begins with the first cool-down steps across the finish line, followed by recovery drinks laden with carbohydrates and proteins, then appropriate stretching & cross-training, leading to recovery runs. Correct handling can significantly shorten recovery time, while mishandling can lead to injury.
The recession of 2008 – 2009 put tremendous stress on our national economy. The initial dose of stimulus could have worked, but it took way too long to get the funds into the system. It was followed by partisan law-making, then absentee leadership leading to dysfunctional government. Unfortunately, our policy makers mishandled the recovery and our national economic engine is now injured.
Like our bodies, eventually the economy can heal itself. It is too late for “recovery drinks” and quick fixes. Our policy makers don’t seem to understand that business has the ability to create jobs, but can (and should) only do so when there is a long run benefit to the employer.Regardless of government’s direction vis-à-vis regulations & taxation, businesses will usually find a way to survive (and create profits).
Now it is time for steady, even-handed, clear policy direction.
Instead, we have complete uncertainty about the direction policy-makers will choose. The “Super Committee” could reach some type of grand compromise, we will know sometime next month if they are able to put the nation ahead of their party. Expectations for their success are low. Global businesses, including most large American companies, are unlikely to make long run commitments (building plants and hiring workers) within the borders of this country until the uncertainty emanating from Washington abates. That might not happen without another wholesale overthrow of the incumbents in 2012.
Currently, there is a huge disconnect between popular feelings and economic reality. Consumer confidence is at or near historic low levels, while corporate balance sheets and profits are at or near record strengths. And while unemployment remains above 9%, the economy is growing slowly and many important economic measures are in positive territory:
- Vehicle sales have climbed back to 13.1 million units, about where they were before the Japanese tsunami disrupted supply last Spring;
- Retail sales rose 0.6 % in September and 0.4% in August, the most since March;
- US Manufacturing activity increased in September, for the 26thconsecutive month;
- US Service Sector activity increased in September for the 22ndconsecutive month.
In the past, when consumer sentiment is this low, the ensuing 12 months of stock market returns have been particularly good. Conversely, when consumer sentiment is at relative highs, it may be a good time to trim exposure to stocks. As is so often the case with herd mentality, rational thought is trampled by emotional behavior to the detriment of the individual.
Following my run in the 2009 Boston Marathon, I didn’t take the recovery seriously and spent most of the next year fighting a plethora of minor injuries. One week I felt great only to have some new ailment the next. Since my last newsletter, the stock market has been suffering a similar fate, oscillating in a trading range between 1120 and 1220 (on the S& P 500 Index).
Once I quit trying to fix every minor annoyance, corrected some underlying problems, and balanced my training, I began to run essentially pain free. Likewise, once policymakers quit trying to micromanage the economy, and correct some systemic problems, and balance their approach to governance, the economy should be able to get back to its normal mode of creating wealth for all Americans to enjoy.
Make no mistake about it, the challenges facing our leaders, as well as those facing the Europeans, are daunting. The country is as divided socially and economically as at almost any time in the past. But investments in companies are different than investments in governments.
In the short run, expect a bumpy ride. Focus on the long run and the daily noise fades into insignificance.
As always, please feel free to call or email me with any questions or concerns.
SOURCES: Institute for Supply Management; J.P. Morgan Asset Management; The Wall Street Journal (www.wsjonline.com); Yahoo Finance; LPL Financial Research
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