In the Information Age, we constantly get bombarded with the world’s economic problems. Each headline comes with its own shocking revelation and many articles create the expectation that there are quick fixes available. This headline-grabbing, over sensationalism serves not only to generate interest, but it can also stir up fear and negativity. Certainly, there are issues facing us like the European sovereign debt, uncertainty in Washington DC, and slowing growth in China. As we have reviewed actual economic data, I am reminded by the story of the race between the Tortoise and the Hare, where we are taught that “Slow and Steady” wins the race.
The reality is that our country has dealt effectively with many difficult issues over the last 200 years and .problems that have been in the making for decades tend to get solved over time, not overnight. Since 2009, we have been working through these issues in a slow and steady way, and a lot of progress is being made. In the U.S. we have been through the economic wringer and we are emerging stronger and hopefully a little wiser.
Economic growth in the U.S. is expected to be around 2% for 2012. Ben Bernanke has indicated that economic growth is not where we want it to be, but there is measurable growth. The Federal Reserve has shown that they are relatively unconcerned about inflation and they are focusing their efforts on unemployment. Over the past year, oil prices are down 15% and average retail gas prices are down 6%. Through May 2012, the consumer price index was +1.7% for all items for the trailing 12 months.
Debt levels for individuals, businesses, and state/local governments are coming down at a nice steady pace. Individuals are saving more and they are each being forced to live within their means. Individuals and businesses have also been refinancing debt and taking advantage of the lower long term interest rates. The deleveraging and increased savings are one of the reasons that we are having slower growth, but will serve us well when our federal government is forced to demonstrate more financial responsibility.
American businesses are lean. Cash levels are close to all-time highs, which give businesses the flexibility to pay dividends, buy back stock, further pay down debt and/or invest in growth. They are being very cautious with their inventory levels, which is keeping growth at a moderate level, but will naturally rise as growth continues. Retail sales have been steadily increasing and U.S. auto makers just reported June sales up 14% over 2011 levels. In the first half of 2012, the S & P 500 was up 8.3% and the Barclays Capital Aggregate Bond Index was up 2.1%. The Price Earnings Ratio on trailing earnings of stocks is currently less than 13 times, a relatively low level based on current economic conditions.
Two industries that have faced the brunt of the downturn are showing signs of improvement. Banks as a whole have substantially paid back TARP funds with interest and profit levels are increasing nicely. Home builders are gaining confidence and are on pace to build nearly 700,000 new homes in 2012, which would be about 12% higher than 2011.
In Europe, Germany is providing leadership and Europe is slowly working through their issues. There are no quick fixes and improvement will take time and cooperation. The growth in China is slowing to a more sustainable long-term level; however, their central bank recently lowered interest rates to help stimulate additional growth.
And last, we have uncertainty regarding political and debt issues in the U.S. Over the next 6 months a lot of uncertainty will be replaced with answers regarding the elections, health care, taxes and the strategy for reducing our national debt. The people of the U.S. seem to be focused on electing politicians that are thinking about growth, job creation, and the welfare of future generations and they are waiting to see what party comes up with the best plan.
As you can see, although all problems have not been solved, there is slow and steady progress being made. When you add into equation the resilient, industrious, and hardworking nature of Americans, it is hard not to have an optimistic and confident long term view of our economy. Just remember there are no quick fixes and that slow and steady wins the race.
Investing and Financial Planning
We like to apply this slow and steady approach to investing. Although we may have an optimistic view, there will likely be bumps in the road along the way, especially during the seasonally slow summer months. However, any weakness should be viewed as a buying opportunity for savvy investors. Stocks are still relatively cheap based on historical levels of profitability and growth.
One key we have found that helps clients maintain confidence during these uncertain times is the development of an overall financial plan. Developing and implementing a comprehensive plan that takes into account your goals, time horizon, risk tolerance, asset allocation, need for diversification, saving levels, budget, estate plan, need for insurance and tax situation – all can help one sleep better at night. We like to call it Building Wealth Wisely – The disciplined integrated process of planning, investing, monitoring, protecting and growing one’s assets over time.
Our IMS team utilizes its experience, expertise and industry leading software to help generate financial plans for our clients. The potential changes, over the next 6 months, in the tax arena regarding Obamacare, estate taxes and capital gain rates, provide an opportunity to review and potentially update your investment and financial plans. At IMS, we are prepared to help you develop your comprehensive plan or just help you work on any one aspect of your finances as needed. Please feel free to contact us to set up an appointment.
While we may not highlight it very often, IMS has an outstanding capability in the area of managing individual bonds portfolios. Our experience and track record have allowed us to significantly grow this part of our practice over the last decade. Don Shute, CFA, a fixed income research analyst and portfolio manager with IMS, has over 20 years professional experience researching and investing in bonds. Don and I work as a team managing bond portfolios.
In today’s, low interest rate environment, we are finding that some investors are unwilling to settle for the sub 1% rates offered by the banks and some can’t stomach the ups and downs of even steady dividend paying stocks. If you fall into this category, you may want to call us and discuss the pros and cons of a managed portfolio of individual bonds. One of the benefits of owning bonds is lower volatility. Individual bonds also offer the option of holding until maturity, which can help you ignore the impact of rising interest rates on current prices. Another advantage is that we can customize a portfolio of bonds that are relatively short-term in duration, so the impact of rising interest rates can be relatively muted. We generally require at least $500,000 to manage a portfolio of individual bonds. If you would like to know more about this option, we would be happy to discuss it with you.
We appreciate your support and we look forward to working with you in the future.
Carl W. Marker
Found, Chairman & Chief Investment Officer