The Time it Takes for the Earth to Circle the Sun

Weekly Market Commentary 1-30-12

Tim Phillips, CEO – Phillips and Company

A few things happened this week that give significant clarity around the winners and losers in our economy this coming year.

Event 1: As expected, the Federal Reserve announced no change in interest rates. However, they did unexpectedly change their specific language for when rates could increase from “mid-2013” to “late-2014.” The Fed cited two specific reasons for the change: continued weakness in our labor markets and a global slowdown (i.e. Europe). Clearly, they see more need for accommodative rates to support the fragile growth we have in our economy.

Event 2: US GDP Estimates were released for Q4 2011. They showed the economy growing at an annual rate of 2.8% in Q4 of last year. Growth is always welcomed; however, when you look behind the headline numbers you see two interesting facts. First, business’s rebuilt inventories to the tune of 1.9 percentage points of the 2.8% (that's BIG). Second, the US Consumer grew spending by 2 percentage points (There were several categories that subtracted GDP therefore these two numbers won't add up). Our conclusion, inventory rebuild cannot be depended upon to add to GDP in the coming quarters as businesses don’t just build blindly. Especially, as consumers still appear very cautious about spending.

% Change in Personal Consumption Expenditures

percent change in personal consumption expenditures

Change in Private Inventories

change in private inventories

Event 3: The President focused his State of the Union Address on rebuilding the United States’ manufacturing base. We view this as a good thing because much of what we manufacture is exported and exports generally benefit from a weak dollar. Because of the Feds unexpected actions (event #1), we should continue to see a weaker dollar. The manufacturing sector can be a large employer and an improvement in this sector can help improve the labor markets.

Without revisiting our yearly forecasts the storyline of these three events is pretty clear: Continued slow growth ahead for the next year or so.

Given these events, as an investor I might consider a few things:

  • Pushing fixed income maturities out a bit (from 3-5 years to 5-7 years)
  • Look beyond dividend paying stocks and perhaps select some energy and agency issues that can enhance income. Be careful as these can be tricky investments.
  • Inflation is a customary risk with all this cheap money floating around and certain commodities are going to be attractive. I don't necessarily believe inflation is a threat in the short run. Most of this cheap money is still being used to repair balance sheets for business and consumers. Without money chasing goods and services, employment dropping; inflation might be a delayed effect.

One thing seems certain; we could be in store for another average year. As an investor and advisor, I would strongly look past just one years’ worth of numbers as they really are irrelevant. I was recently reminded of that by economist Robert Shiller when he quipped, “I don’t know why people keep using one year earnings. That is the time it takes the earth to go around the sun. I don’t see any other significance.”

DJIA annual returns and average return the following year

If you have questions or comments please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can Email me directly.

Tim Phillips, CEO – Phillips & Company

Research Provided by:
Adam Gulledge, Associate – Phillips & Company