Weekly Market Commentary 12-20-10

Now What

The $800 billion Clinton-Bush-Obama Tax Plan is in the books. The $600 billion Fed bond purchase program is underway and the stock market is moving higher as a result.

spx during QE

United States GDP estimates for 2011 are inching up with some very notable experts, including Alan Greenspan, suggesting we could possibly see 3.5% growth in 2011.

alan greenspan

The U.S. economy is picking up speed and may grow by 3 percent to 3.5 percent next year - Alan Greenspan (http://bit.ly/hwsl3M)

Mark Zandi

Instead of another year expanding at no more than the U.S. economy’s potential growth rate—with job gains of 1.2 million and unemployment hovering near 10%—real GDP growth will accelerate to 4%, job gains will pick up to 2.8 million, and the unemployment rate will decline to around 8.5% by year’s end.- Mark Zandi (http://bit.ly/hRT7RN)

Mohamed El-Erian

Pacific Investment Management Co., manager of the world's largest bond fund, raised its growth forecast for the U.S. economy to between 3% and 3.5% for 2011 from an earlier estimate of 2% to 2.5% - Mohamed El-Erian (http://aol.it/g7sx8u)

Bob Doll

The economy will expand about 3 percent next year,- Bob Doll (http://bit.ly/e5rxkU)

In addition, optimism among U.S. chief executives in the fourth quarter rose to the highest level since the start of 2006. Business leaders projected increased sales, investment and hiring according to a Business Roundtable survey. (http://bit.ly/f78rkG)

Experts: Guessing Early and Guessing Often

Next up will be an assortment of investment experts giving us their very precise and inaccurate predictions for 2011. One thing I have grown to despise but appreciate is the general public desire for precise predictions. Unfortunately, the more precise a prediction is, the more inaccurate it becomes. Forecasts will be calling for upgraded GDP growth in the 3% range for all of 2011 and some of this "parlor trick" prognostication may move the markets. Further, I expect most experts will be calling for the S&P 500 to advance 11%-17%.

I like all of this. It sounds wonderful. But I’m not sold just yet. I know how unpredictable these prognostications can be when we still have 9.8% unemployment, 9 million underemployed, and housing starts and housing prices at record lows.

job losses in post WWII recessions

US Employment level, part time for economic reasons

new home sales during recession

real house prices over time

So I'm going to continue to watch and see if people return to work, consumption patterns broaden across all Americans, wages increase, savings rates drop, revolving credit expands and business start making more investments. Essentially, see that everyone other than the US Government is demonstrating confidence and betting on growth.

With all of that said, we should also be investing because if investors miss just a few critical days of stock market gains they lose out on critical returns. Burton Malkiel summarizes this nicely in his Wall Street Journal article, 'Buy and Hold' Is Still a Winner:

Buy and hold investors in the U.S. stock market made an average annual return of 8% during the 15 years from 1995 through 2009. But if they had missed the 30 best days in the market over that period, their return would have been negative.

So What Now?

If 2011 is indeed another expansion year you should be doing the following:

  • Re-examine your asset allocation to ensure you are properly allocated across the right asset classes, sectors and segments.
  • Evaluate the risks you took out of your portfolios and make intelligent choices about the risks you want to add back into your portfolios to capture appropriate opportunities.
  • Aggregate all the various accounts you might hold and look at your allocation from a macro perspective. I'll bet you will find some interesting flaws and misconceptions once you look at everything in totality.
  • Make a commitment to review your current assets and determine your future liabilities and claims on those assets to ensure your managing those assets properly. More succinctly, budget your risks based upon realistic growth requirements.

economy expansion graphic

While many aspects of next year are uncertain, I do know that we are going to be stronger partners with all of those that turn to us for advice and counsel. That's what’s next.

On behalf of everyone here at Phillips and Company we wish you a very peaceful holiday season, and a happy, healthy and prosperous New Year.