Americans are becoming accustomed to Summer economic slowdowns as well as pullbacks in their investment portfolios and, if past Summers are any indication, buckle up for more turbulence.
Since the end of the first quarter, the U.S. stock market as represented by the Standard & Poor’s 500 has declined by more than four percent through this past Thursday as economic data across-the-board, both here and abroad has weakened considerably. Initial Claims for Unemployment Benefits, Housing Starts, Retail Sales, Personal Income and Consumption, Consumer Sentiment, Industrial Production, Business Sales and Inventories as well as and inflationary pressures have all been fraying around the edges. Although still positive, Gross Domestic Product (the sum of all goods and services produced in the United States), has slowed to a crawl as both businesses and individuals alike have turned a wary eye to the upcoming Presidential Election in November, the approach of another bout with the debt ceiling, the end of the Bush era tax cuts in addition to the situation outside the United States, specifically the liquidity and potential solvency crisis within several European countries. Let us state that these are all cause for concern and have written extensively within The Record as well on our website (www.faganasset.com) regarding these issues.
The Open Market Committee of the Federal Reserve, the body that determines monetary policy, after its meeting June 20, released a statement that contained the following cautionary notes. “Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated….Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed.”
Also this past week the Federal Reserve released its updated projections for the economy in which its “central tendency” (removal of the three highest and lowest estimates) for annualized U.S. Gross Domestic Product this year now ranges from 1.9% to 2.4% as compared with 2.4% to 2.9% in April, ranges from 2.2% to 2.8% in 2013 as compared to 2.7% to 3.1% in April and between 3.0% to 3.5% during 2014. The Federal Reserve is also projecting the Unemployment Rate to gradual decline through 2014, but does not see it going below seven percent.
What’s the Fed to do? Despite the self-described limitations of the impact, solely of monetary policy, the Fed has extended Operation Twist, in which it is selling approximately $270 billion of shorter-term U.S. government debt and buying the same amount of longer-dated maturities, hoping to reduce the cost of borrowing, thus spurring economic growth.
THE BOTTOM LINE – Despite these cautionary signals, the U.S. economy as well as stock market is nonetheless the “cleanest shirt in the laundry.” At some point in time investors will hold their respective noses and put money to work in the stock of publicly traded companies domiciled in the United States. That said, over the near term we remain cautious and expect this choppy trading environment to continue. Buy on weakness, not strength. Trade up in quality. Look for dividend paying companies or companies with long-term, secular growth stories (NKE, MCD, AAPL, etc…) and most importantly, be patient.