D3 Business Update:
Hopefully all of you have had the opportunity to review your performance reports in conjunction with your financial plan updates. Please call the office to schedule an in person appointment or a conference call review.
D3 Investment Insight:
What a week for the markets. Stocks tanked and bonds rallied ferociously. This is exactly the reason why we focus on asset diversification in all of all clients’ portfolios. Let’s focus now on why this market volatility is occurring.
Our outlook in our last letter focused on the uncertainty facing the capital markets. Specifically we said, “Until some certainty is determined in this arena, we do not see any incentive for the equity markets to move forward, even if second quarter corporate profits are stellar. We anticipate a consolidating, sideways market for U.S. equities until this is resolved.”
The uncertainty regarding the debt ceiling wasn’t really resolved, contrary to how the media portrayed it. Congress just delayed and delegated the major spending cut decisions to the 12 members of the “Super Congress.” Additionally the major credit rating agencies continue to put the U.S. government on notice that we need to get our fiscal house in order and the perceived dysfunctional politics is a major impediment to that effort.
The uncertainty regarding how the economy is performing, has become more clear. It is clear that economic activity has slowed down to the point of potentially stalling. Economist are now saying the “R” word again (recession). We all have heard that this has been a jobless recovery keeping the unemployment rate high, but over the past week we received a triple whammy of negative economic reports. U.S. gross domestic product numbers came in below expectations at 1.4% for the 2nd quarter and were revised down to .4% for the 1st quarter of this year. Personal spending declined .2%. This was the first negative number since 2009. Manufacturing and Service sector economic activity reports came in at barely over 50, with numbers below 50 indicating economic contraction. The only somewhat positive economic report was the jobs report this morning, estimating that the unemployment rate went down to 9.1% from 9.2%. Although looking behind the numbers the participation rate (those either working or looking for work) fell to 63.7%, the lowest rate in 27 years.
Combining the poor macro economic numbers with the prospect of the Federal Government cutting spending by up to $2 trillion dollars spooked the market into more than a consolidation phase and outright into a correction phase. The question the markets are asking now; is, where will the growth be coming from if the general economy is slowing down and the federal government will be shrinking. The market’s answer, as of today, is that stocks are flat for the year and are down about 10% from their April 2011 highs.
D3 Investment Outlook:
We had hoped that Congress would have focused their efforts this summer on a job creation program and a balanced approach to deleveraging the government, rather than saber rattling and bipartisan politics. Unfortunately, because the stock market is assuming that Congress does not care about the economy and the credit rating of the U.S., there is a real possibility of credit becoming tight again. As a result we anticipate weaker than expected economic growth than had been previously forecasted.
From an equity standpoint, reported 2nd quarter corporate earnings were again outstanding (up approximately 20% over last year). For the most part, corporations have indicated that they will continue to generate profits in 2011. 32% of companies paying dividends have raised them so far this year generating an 11% increase in investor cash flow. The dividend yield on the S&P 500 is nearly equal to the yield on 10 year treasury bonds (approximately 2.5%). As a result of the correction, equities appear to be undervalued from a price/earnings and dividend yield standpoint.
Looking at the three pillars of the U.S. economy; the consumer, business and government, the strongest pillar is business, especially large global businesses. Consumers are dealing with too much debt, a decline in home prices and a lack of job creation. The government is also dealing with too much debt, but most of our politicians don’t understand economics well enough to perceive the deleveraging ramifications. Big business has been operating efficiently, growing profits and improving their balance sheets. Unless the federal government decides to raid the business sector through higher taxes, this area appears to us as the safest and most likely sector to generate positive long term returns.
D3 Investment Strategy:
The risks in the equity market are centered on growth and liquidity. Reflecting these concerns, we will have been raising cash for your cash flow needs. We are also allowing income to increase up to 5% over our target allocations. Until we have a stronger a conviction, our investments in equity oriented mutual funds will be focused on large dividend paying stocks, strategic income and alternative investments.
We are monitoring your investments daily and taking actions consistent with your financial plans. Please let us know if anything changes in your financial lives (i.e. cash flow needs, time horizons, risk tolerance). Thank you for your confidence in D3 Financial Counselors.
Donald D. Duncan MBA CFA™ CPA CFP® Adam Glassberg CFP®
Michael Meyers MBA CFP® Patty Shipinski, Office Manager
Neil Lefort MBA J.D. CPA Ryan Pace, Junior Financial Planner