July 2012 Monthly Outlook – What a difference a day made!

“What a difference a day made. 
Twenty-four little hours. 
Brought the sun and the flowers. 
Where there used to be rain”  (sung by Dinah Washington and Tony Bennett)

Coming into the last week of June everyone was focused on the European debt crisis and concern over a slowing US economy.  These fears fueled a 10.9% decline in the equity markets (basis S&P500) from the high on 4/2/12 into the low on 6/4/12.

And what a difference June 28, 2012 made.  That day saw 3 significant events – 2 of which will have lasting impact on all of us.

Last Thursday, June 28, 2012 saw European leaders agree in principal on a new, and expanded, program to support the European banking system.  While this will not solve all of Europe’s debt problems, it was enough to reduce the concern of an imminent failure of the system.  Also last Thursday, the US Supreme Court ruled that the Affordable Care Act (Obamacare) was constitutional, albeit calling the individual mandate a tax.  The investment implications of this decision are 2-fold.  First, the Affordable Care Act contains a 3.8% additional tax on dividends and capital gains for anyone earning over $200,000 (including investment income) for individuals and $250,000 for a couple.   This will likely have people with significant gains bringing asset sales forward into 2012 via the sale of stocks and businesses.  Second, the requirement that all businesses with 50 or more employees provide healthcare or pay a penalty will likely impact hiring in small/mid-size companies.

These events were enough to propel the financial markets to significant gains on Friday June 29th .  With this jump on the last trading day of  the 1st half of 2012 the markets ended with the following results:

Y-T-D % gain / (loss)

S&P 500                                        8.30%  (US equities)

MSCI ACWI                                  4.20%  (All Country World Equity Index)

Barclays US Agg Bond               2.72%  (US bonds)

Barclays Global Agg Bond        1.68%  (Global Aggregate Bond Index)

Going Forward

The question now is what happens going forward.  Numerous economic indicators are flashing a slowdown in the US economy.  However, none of them are pointing to a new recession.  In fact, 2 catalysts have appeared that may help to keep things moving forward.  The first is the drop in gasoline prices.  Gasoline, on average, has declined over 20% since earlier this year. Every one penny ($0.01) decline in price adds approximately $1 Billion to consumer purchasing power (source: Bloomberg).  The recent significant decline in gas prices has served as a huge tax cut to consumers.  If gas prices remain where they are I would expect consumer spending (which accounts for 70% of US economy) to remain steady.

The second catalyst is housing.  I know, I know – you are saying he’s got to be kidding.  But it’s true.  The inventory of homes for sale, as a % of total homes owned, is now down to a level not seen since 2003.  The current level is almost 16% below the long-term average dating back to 1988.  Couple this with record high housing affordability (an index based on house prices, mortgage rates and personal income level) as shown below. This is important as the housing market is a major job creator and significantly impacts GDP (gross domestic product).

 

 

In summary, progress has been made in Europe but it is going to take a number of years to fully resolve their debt crisis.  My outlook for the US is for continued slow, but steady, growth in the economy with one caveat.  The “Fiscal Cliff” (expiring tax cuts and simultaneous spending reductions) needs to be addressed, ideally {not likely}  before the election but certainly before year-end.  The closer we get, the more the uncertainty of the situation will negatively impact economic activity.  I expect the US financial markets to continue to do better than international markets, with all markets gyrating between gains and losses based on the news of the day.

 

Although the information included in this report has been obtained from sources we believe to be reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

 

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results