D3 Business Update:
We are looking forward to seeing most of our clients at our Client Appreciation Dinner, on Saturday, November 13th at Emmett’s Ale House, located one block from our office in downtown Downers Grove. If you haven’t responded yet, please call the office, by November 1st.
We are beginning our annual risk management review focusing on the insurance that our Comprehensive and Retainer clients have. This is another value added service to help you identify any gaps in your insurance coverage. We gathered most of the insurance information from the financial plan update questionnaire that many clients returned to us in May. If we didn’t receive an update on your insurance policies, or if we identify gaps in your coverage, we will be contacting you before November 15th.
D3 Investment Outlook:
September has historically been a frustrating month of negative returns for stock investors, second only to October. In contrast to history, last month, the S&P 500 rose 9%, the best performance since 1939, driven by better than expected macro economic data. Now that many economists and strategists have lowered their economic growth forecasts for the U.S. to less than 2% for 2010 and 2011, it appears that any economic data that meets or slightly exceeds that expectation is viewed as positive news. However, because of the possibility, although small, that the economy could fall back into a recession, the Federal Reserve announced that it was prepared to take whatever actions it deemed necessary to promote positive economic growth.
Another factor preventing stock prices from falling along with reduced economic growth rates is the loosely connected relationship between the profit growth of large American companies and the growth rate of GDP. Corporate profits have grown faster than the overall economic growth rate since the economy began to recover last year, because of the increasingly global nature of U.S. firms. About 40% of S&P 500 pre-tax profits are generated by sales outside of the U.S., and that is expected to increase as sales from emerging market countries continue to grow. Also, the current profitability of American companies is a direct result of the severity of the recession. Recessions often speed the pace of structural changes in many industries. Forced to cut costs in 2008 and early 2009 as sales plunged, companies reduced their staffs, and were compelled to increase the use of cheaper, labor-saving technology. Consequently, payrolls have remained flat throughout 2010 despite rising sales.
We have commented in previous newsletters on the very strong financial health of many U.S. companies. These companies have built up cash holdings in excess of $1 trillion, because Chief Financial Officers learned in 2008 that they could not rely on their banks to provide financing if they needed it. Now corporations are beginning to spend that cash. One-third of the companies in the S&P 500 have initiated or raised their dividends by an aggregate of $16 billion this year, while only 3 companies have cut or suspended their dividends. Also this year, according to stock research firm Birinyi & Associates, U.S. companies have announced they will purchase $273 billion of their own shares, 5 times more than was announced by the same time last year. But the increase in buybacks is an indication that companies are reluctant to spend their cash on job-generating activities that could stimulate economic growth. Some companies are hesitant to invest in new products and services while consumer demand remains uncertain.
The avalanche of American companies announcing 3rd quarter earnings begins this week, we are watching to see how profits have been impacted by the slowing U.S. economy. The optimists predict that continued gains in productivity will allow firms to push margins higher. The pessimists argue that companies can’t cut costs any further than they already have, and can’t raise prices due to weak sales growth.
A great source of uncertainty for the markets is the fate of the Bush tax cuts, which are scheduled to expire on December 31. Congress failed to take action before the November elections, as the weakening economy began to persuade some Democrats to consider extending the cuts in 2011. Taxes will rise on earned income, capital gains and qualified dividends if Congress does nothing. Consequently, election results will indicate the course of tax policy, but new legislation may have to wait until the new Congress takes the oath of office in January.
D3 Investment Strategy
Deflation rather than inflation is the Federal Reserve’s primary concern. This will be the second year in a row that there will be no increase in social security benefits. Because of the near-term uncertainty regarding deflation, economic growth, tax policy and the impact on corporate profitability, we currently do not have a strong conviction that stocks are attractively priced. Due to the strong performance of the stock market in September, the vast majority of clients have equity allocations that are very close to their target allocations. We took advantage of the rally to sell some riskier, more volatile funds, and replace them with new funds with historically lower levels of risk. For new funds in client accounts we continue to dollar cost average into your target asset allocation.
We look forward to seeing all of you at our Annual Dinner. Please call us anytime to discuss any concerns you have, and thank you for your confidence in us during these uncertain times.
Donald D. Duncan MBA CFA® CPA CFP® Adam Glassberg, Financial Planner
Peter Marchese MBA CFA® Patty Shipinski, Administrative Assistant
Michael Meyers MBA CFP®