Investing and Anemic Growth
Fears of economic problems are in the air and U.S. growth is tepid, yet the stock market is doing quite well. How to deal with this seeming paradox? Stay invested for the long pull because there are reasons for optimism.
What we have is anemic growth, but it is growth. This is not 2008. Both personal and business balance sheets are in much better shape today than they were four years ago. Successful investing takes time and patience. We live in an uncertain world, so thus, please remember the Wall Street Maxim: “The market climbs a wall of worry.”
A year ago the Economic Cycle Research Institute (ECRI) announced that the economy was getting ready to slip back into a recession. This is a highly respected organization and has been right far more than it has been wrong. However, since making this call, the stock market is up 29%, gross domestic product increased at an annual rate of approximately 4.1% (assuming 1.5% in the third quarter and recognizing that the economy is slowing down), and consumers are spending and borrowing more.
In fact, real GDP must contract by 2.5% just to get back to the same level it was when the ECRI announced the pending recession. A lot of the recent slowdown can be laid at the feet of consumers and businesses, which have been cautious about borrowing and spending money, in light of the upcoming presidential election, and uncertainty regarding the economy and taxes.
It is entirely possible that regardless of who gets elected, this pent-up demand could prime the pump next year, particularly in the latter part of the year. While a recession is always possible, if one occurs, it would likely be very small. In America, we are blessed with an increasing population, which means that we require more goods and services – and more housing.
The housing industry appears better now than it has in five years. In fact, it is entirely possible that construction could add 1% to GDP growth next year and possibly the sole reason that a recession does not occur. Add to this that job growth was revised upward by almost 100,000 jobs for the previous couple of months and unemployment surprisingly slipped to 7.8%, and it also shows the potential for growth next year.
Oct. 9 marked the fifth anniversary of the high water mark for the Standard & Poor’s 500. On that day in 2007, the index reached 1565, according to BTN Research. Following that, stocks began a slide during the latter part of the year, held steady into early 2008, and then of course, plummeted, hitting the bottom on March 9, 2009. At present, the S&P 500 is approximately 7% below the 2007 record.
Interestingly, this month is also the 10th anniversary of the low point for the 2000-through-2002 bear market, when the S&P 500 bottomed at 777. This has produced an average annualized return of approximately 6.5%. The NASDAQ has fared better over the past 10 years, producing an average annualized return of 10.9%.
Through the first three quarters of the year, the market posted much better than expected gains with the S&P 500 up 16.44% and the Dow Jones Industrial Average up 12.23%. The major difference between the two measures is one stock called Apple (AAPL), which now represents about 5% of the S&P 500. So its recent decline over the past few weeks brought the S&P 500 back closer to the Dow for the year, but the S&P still leads.
What will happen the rest of the year is anyone’s guess. The market may have discounted the expected third-quarter earnings (analysts say they are likely to dip) and the not-so-rosy forecasts proffered by companies for the next six to nine months. The International Monetary Fund reported last week that global growth will be lower than anticipated for 2012 and they also reduced the outlook going into 2013.
We have said many times that earnings drive the markets, and nothing has occurred that changes our opinion. Simply put, if third-quarter earnings are better than the depressed expectations, the market should have a reasonable chance to hold its own, but if the earnings announcements are below those expectations, a 10% correction is not off the table between now and the end of the year.
What should long-term investors do? Remain invested for the long-term. Studies show that it is impossible to time the market. Even if you sold now and locked in profits from earlier in the year, would an investor be smart enough to get back in at the “right” time? Further, no one is calling for a worldwide recession and so far, it does not appear that one will occur in the U.S.
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V. Raymond Ferrara, CFP, CSA, is president and chief executive of ProVise Management Group LLC in Clearwater, Fla.
This material represents an assessment of the market and economic environment at a specific point in time. Due to various factors, including changing market conditions, the contents may no longer be reflective of current opinions or positions. It is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Please remember that past performance may not be indicative of future results.
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