Stock markets around the globe sold off over the past few days, in part due to the cautious statement issued by the Open Market Committee of the Federal Reserve after their regularly scheduled meeting on Monetary Policy this past Wednesday.
Most notably, the Fed replaced the statement that “downside risks to the economic outlook have increased” released after their August 9th meeting with “there are significant downside risks to the economic outlook.” Believe it or not, just with the addition of the word “significant,” market observers shuttered. What follows are some additional observations by the Federal Reserve.
“Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions.”
“Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand.”
“The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually.”
“The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. (The dual mandate of the Fed is to “foster maximum employment and price stability.”)
To all of the above we respond, “tell us something we don’t know.” Here’s what we think.
There’s about an even chance that the U.S. economy will enter into a recession within the next three quarters as a recession is defined as two consecutive quarters of negative growth in Gross Domestic Product. However, that recession will be both short and shallow.
The stock market has in great part discounted the possibility that there will a short and shallow recession. Perhaps there is another five to ten percent of downside risk if a recession proves shallow. That said, it has not discounted another deep and long one. This bears watching.
Over the intermediate (one to three years) to long-term, with the ten-year U.S. Treasury Note at 1.70%, dividend paying stocks are very attractive. There are dozens of stocks, including McDonald’s, Proctor & Gamble, Intel, Bristol Myers and Abbott Labs that pay dividends far above this Treasury note. Yes, you are assuming more risk. However, there is also risk in locking ten-year money up at 1.70%.
This is not an easy environment to invest in if you don’t know what you’re doing. We often say “just because you can afford to buy the plane doesn’t mean you can pilot it.” Some can invest money on their own. Others need help. It’s an expensive lesson if you think you’re the former and it turns out you were the latter.
This political wrangling in Washington between the Republicans and Democrats is a mess and it is hurting consumer confidence. Like it or not, what hurts Main Street hurts Wall Street and what hurts Wall Street hurts Main Street. Both are hurting right now and the longer this finger pointing, campaigning and stalemate continues, the more there will be repercussions on both streets. It will be very detrimental if this drags out until the 2012 Presidential Election. We fear it may. We hope it doesn’t.