Well on February 2nd Punxsutawney Phil saw his shadow, supposedly signaling another 6 weeks of winter. Ironically, so far winter 2011/2012 has been unseasonably mild and dry for most of the country. This weather pattern has contributed positively to economic improvements in recent weeks. New unemployment claims have continued to decline and household employment has increased. The building and construction industries have been able to keep more folks working due to the weather. Consumer spending is rising due in part to lower home heating bills.
But weather isn’t the only thing helping. The week ending February 3rd marked the 18th consecutive week of stronger US economic data. Employment, vehicle sales and production, chain-store sales (making a new all-time high @ 7% over 2007 peak), banks’ willingness to make consumer loans, and consumer confidence are but a few of the areas showing continued improvement. Even housing is showing signs of life. Nevertheless, there are still way too many folks not working and too many homes either in foreclosure or perilously close.
Risks remain and need to be watched closely. The most pressing is the February 28, 2012 deadline to extend the payroll tax cuts. You may recall that Washington kicked this can down the road for only 2 months at the end of December 2011. They now have only a matter of weeks to agree on extending these cuts through the end of 2012, and this is far from a sure thing. If they do not extend the break, the resulting higher payroll tax costs to businesses and the lower take-home pay for employees will certainly create a drag on the economy. The sovereign debt crisis in Europe remains a big and uncertain threat, although they seem to be making progress to stabilize a situation which will take years to completely fix. Iran remains a wildcard. With legislative elections in early March, any increase in hard line rhetoric will likely boost the risk premium on oil and in turn hurt consumer wallets/pocketbooks.
Having said all this, I continue to feel that the expansion is becoming self-sustaining but could suffer a setback if these or other unforeseen risks come to fruition .
Four Percent Januarys: Given the culmination of a 4.36% first month of 2012 (basis S&P 500), I thought it appropriate to take a more detailed look at the historical precedent set by similar starts to the calendar year. The last 17 cases of “Four Percent Januarys,” dating back to 1950, all extended their gains into August.
While this analysis indicates that (based on history) the uptrend could continue, I am cautious right now and plan to wait for a pullback (which I expect to be brief and shallow) before committing more of your capital to the equity markets. I continue to monitor the economic and financial landscape in accordance with your investment objectives, risk tolerance and time horizon.
Please call me with any questions or concerns. Also, feel free to forward this note on to anyone who you feel could benefit from it.
Sources: International Strategy and Investment, Raymond James & Associates
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