Let me start by saying my thoughts and prayers are with you, your families and friends. I wish everyone a quick return to normalcy.
An amazing sequence of events are occurring right now. Third quarter corporate earnings began in early October and the results show a slowing in corporate profit and revenue growth. Economic indicators, which had been weak during most of the summer, took a decidedly positive turn since the end of September. Sandy wreaked havoc all over the East Coast. Lastly, we have a major national Election next week.
Determining both the near-term and long term impact of these recent events is difficult to predict but I will share my current thinking on each one.
1. Corporate profit and revenue growth have slowed mostly from CEOs holding back on expansion plans, capital expenditures, new hiring, et al, due to uncertainty over the upcoming election and where government policies on taxes and regulation are headed. Corporate balance sheets remain in their best shape in years and cash on hand is at record levels.
2. Economic indicators have turned in a positive direction, led by housing and consumer spending. Consumer confidence has been rising along with housing and stock prices and is now at a level not seen since early 2008 (before the financial crisis). Below is a chart, courtesy of International Strategy and Investment, of their economic diffusion index. This index takes into account most key economic factors and looks at how many of the indicators are moving in a positive direction versus those moving in a negative direction. You can see how this index has hooked up, as it did in the fall of 2010 and 2011, when the economy picked up some steam.
3. Sandy will have a significant impact on the economy but not all of it will be bad. The damage to property, the loss of revenues and jobs at businesses destroyed, the impact on airlines and other transportation services will surely reach into the tens of billions of dollars. Also, while Katrina was a relatively localized event (New Orleans), Sandy impacted a large part of the East Coast and disruption to normal business activity is likely to go on for months. The positive offsets will be from government relief; the jobs created for repairing/replacing/rebuilding of property; sales of equipment & materials such as tools and generators; lodging for displaced families and even cars sales as people need to replace destroyed vehicles.
4. The 2012 elections will have a profound impact on the direction of the country for years to come. The immediate issue is dealing with the Fiscal Cliff before 12/31/12. Going forward the President and Congress will need to get the economy growing at a more sustainable pace while simultaneously reducing the country’s budget deficit and debt load. This is a daunting challenge for whoever gets elected. In my humble opinion, the only way out of the current situation is compromise – a very dirty word in politics these days. All of us need to be willing to accept lower spending by government (read: few services and benefits) and be willing to pay a bit more in taxes. If you are interested in reading a very thoughtful narrative, courtesy of BlackRock, discussing the implications of the election on the economy and investments, contact me and I will email it to you.
Right now I am waiting for the outcome of the elections before making any decisions on how to adjust investment portfolios.
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