September 2011 Outlook

Glass Half Empty or Glass Half Full?

As we move into the fall season I think one needs to decide if they see the glass as half empty or half full.

Well, I am glad to put August behind us.  What a month it was.  It started off with political gridlock – at its worst – over the US debt ceiling and deficit and ended with Hurricane Irene on the East coast.  Along the way we saw unprecedented volatility in the financial markets, the apparent fall of another dictator in the Middle East, the continuing saga of the European sovereign debt crisis, heightened concern about a double-dip recession in the US and (just for good measure) an earthquake that was felt from South Carolina to New England.

“There are decades when nothing happens; and, there are weeks when decades happen!”  Vladimir Lenin.  Clearly, the past few weeks “speak” to that quote.

Depending on how you look at things the glass could be half empty or half full.

Glass Half Empty

1.       Eurozone debt crisis leading to possible regional recession

2.       Bank stocks weak everywhere except China

3.       US budget deficit vs. additional stimulus stalemate

4.       Global economic drag caused by fiscal tightening

5.       Persistent unemployment and lack of job growth in the US

Glass Half Full

1.       US economy slows, but continues to grow

2.       Federal Reserve is still proactive with monetary policies

3.       Corporate profits continue to increase

4.       Inflation cools globally as commodity prices decline

5.       Global central bank monetary easing cycle resumes

Even a natural disaster like Hurricane Irene makes one consider both views  – while many homeowners and businesses were negatively impacted by flooding, many businesses will experience increased sales from storm related products like batteries & bottled water (grocers), generators & pumps (Home Depot) not to mention the cleanup and repair work that should provide jobs for unemployed construction workers.

At the end of the day I believe it will be the US consumer who dictates what happens.  If US consumer spending ? which makes up 70% of our economy ? remains stable then I would call the glass half full.  If consumer spending starts to decline then my view would be more negative.

Below is a chart from International Strategy and Investment,  a research firm in NYC that tracks consumer spending among other things.  Their commentary on consumer spending is ?Real consumer spending slow but already above its 2007 peak.  Nominal consumer spending is even more so.?     (Note: scale is Trillion US$.  Real spending = adjusted for inflation. Nominal spending is not adjusted for inflation)

On September 1st , reports of retail sales for August were mostly positive.  Despite lingering high unemployment and sagging consumer confidence retailers like Costo (+11%), Limited Brands (+11%) and General Motors (+18%) posted strong gains in August sales. This seems to indicate that the consumer is still spending, albeit in a more cost-conscious way.

Here is another comment from ISI?s retail analyst – ?Every casual dining company that has spoken to Wall Street has said they have seen no evidence of behavior change despite all the scary headlines of the past six weeks or so. If we have a recession, this would be the first one in my 25 years as an analyst that was not foreshadowed with weakness at full service (the most discretionary) restaurants.?

While this all sounds encouraging, this mornings?  (9/2/11) jobs report showed that ZERO net new jobs (Private sector +17,000, Government sector -17,000) were created in the US in August.  This is well below the roughly 200,000 new jobs per month needed by a growing economy.   Next week President Obama will layout his program to generate new jobs.  Whether that program can be approved by Congress is a question, as is whether it will be effective at creating new jobs.

As such I am taking a wait and see approach on both the US consumer and the US government as to whether the glass is half empty or half full.

Here is a final thought on the equity markets from Schaeffers Research.

Awful Augusts: There is a silver lining to the very painful August we’ve endured. Historically speaking, when the SPX tanks in August, the last four months of the year tend to bounce back in a big way. Below are the 10 worst August returns over the last 30 years, and you can see how the market performed during the rest of the year. Only once did the market end lower, in 1981.

The average gain for those 10 years is 8.5% over the last four months of the year (that’s about 28% annualized). So, in those years listed below, traders who sold their equity holdings in a panic during the late-summer drop missed out on significant gains for the rest of the year.   (Source: Schaeffers Research)

I will continue to monitor the economy and financial markets closely and in accordance with your investment objectives, risk tolerance and time horizon.

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