Looking Back to January 2011

On January 26th, 2012, posted in: Economic News, Newsletter by

About the Economy

Looking back to January 2011, the year started on a high note and ended on one, too.  What happened in the middle was frantic, noisy and bothersome to most investors.

A year ago, in late 2010, the bears seemingly had gone to sleep.  The Dow Jones Industrial Average (DJIA) finished 2010 – up15.6% in the final four months of the year.  Real GDP grew 3.1% in 2010, its fastest expansion since 2005.  The unemployment rate although still high (9.4%), was buoyed by growth in the private sector which had been positive for 10 consecutive months.

The stock market continued to roll in early 2011, with the DJIA hitting 12,810 thru April. Then, the wheels fell off or at least it looked that way.  Real GDP growth slowed sharply, unemployment went higher and the stock market had a major (-16%) correction.  In August, both retail sales and non-farm payrolls were flat.

Mother Nature struck hard as massive tornadoes tore up Tuscaloosa, AL and Joplin, MO.  Remember the huge tsunami in Japan and a major nuclear event unfolded?  Washington, DC went to war over the debt ceiling.  Standard & Poor’s downgraded US Treasury debt and all the while Europe burned, at least financially.  The “Super” Committee failed. And to add whip cream to everything else MF Global filed for bankruptcy and is still trying to find where billions of dollars went.

The bears woke up, turned up the volume and started screaming about an imminent recession maybe even a depression. Their evidence was strong and they had a very receptive audience.

In August, after the weak data of the summer, Nouriel Roubini the prophetic oracle told everyone “The macro data…will come out worse and worse, the market will start to correct again. We’re going to a recession, we are at stall speed and we are running out of policy bullets.” In September, the co-founder of ECRI (Economic Cycle Research Institute) said the USA is, “indeed tipping into a new recession and there’s nothing policy makers can do to head this off.”  They have reiterated this in recent months.

For some reason, the media accentuates the bearish calls (about recession or depression) and gives a massive amount of coverage – headlines, breaking news banners, and continued references in just about any story referring to economic data or market performance for weeks or months after the call is made.

In 2011,  he economy began slowly, but then picked up speed as the year progressed.  Real GDP grew at a 0.3% annual rate in the first quarter, but accelerated in Q2 and Q3 (1.5%). The consensus puts Q4 real GDP growth at 3.5% to 4.0%.  And remember all those reported zeros in August?  Revisions now show there was really positive retail sales and employment growth instead.  Not only did the economy avoid recession, but it is likely economic growth in 2012 will accelerate.

Think of it like a scale with good things on one side and bad things on the other.  According to many of the optimistic economists, the good things outweigh the bad.  This was true in 2009, 2010, 2011 and should be true is 2012.

On the good (or growth) side, new technology, the Fed and a slightly better fiscal outlook are all positives.

In case you have missed it, the US is experiencing a wave of new technologies – the Cloud, Tablets, Smart-phones among the most important.  New oil and natural gas drilling techniques are coming online.  These new technologies are increasing productivity and output despite the not so super Committee, the S&P downgrades and Europe’s financial problems.  The Fed is holding to the low interest rate policies and believe it or not, federal spending is declining as a share of GDP.  Combined, these developments will boost economic activity in the coming months.

But, there are negatives as well. Despite the rise in the US Spending/GDP ratio, government spending is too high, regulation is unreasonably burdensome and the Fed’s accommodative money policy has downsides.

Government spending may be falling as a share of GDP, but it is still very high.  Government meddling limits job creation and holds back real GDP growth from reaching its true potential.  Excessive regulation does the same thing.  And while an easy Fed boosts growth, it also creates inflation, which will become more likely in the months and years ahead.

Netting all this out, our scale is still tilted toward growth.  New US technologies and the resulting productivity are so powerful and positive they are overwhelming the drag from bad government policies.  Compared to forecasts of recession, it’s a miracle.  Look for another miracle in 2012.

Having said all that, 2012 limped into being on a tepid note as the markets continued to slosh around apparently indifferent to the economic data, or lack thereof.  Here is a sample of what the analysts and so called forecasters had to work with:

The Conference Board’s Index of Consumer Confidence increased more than expected, from 40.9 in October to 64.5 in December.  Those surveyed were more upbeat about employment opportunities and their income improving over the next six months. Wonder why?

We saw initial jobless claims go up last week 15,000, from 366,000 to 381,000.  It is likely this will continue to rise in coming weeks as seasonal, part-time work declines.

Even those skimpy data items were contradictory – one up, one down; one positive, one negative.

For November –

New Single Family Home sales increased 1.6%. Inventory is now at 6 months. It is expected the annual pace of sales will triple once the short sales and foreclosure inventory dissipates.

New orders for durable goods increased by nearly 4%. This nearly doubled the consensus of expectations. Unfilled orders for core capital goods hit another all-time high.

Corporate profits and cash on the balance sheets of non financial companies are both at record highs. Business investment is poised to reach a strong pace in the coming years.

However, despite these positive indicators, there is a likelihood of a recession in Europe (some would say they are already experiencing it). The slowing growth in the world’s emerging markets like China and India adds to the challenges for the USA to maintain its high level of exports. This puts a restraint on our GDP growth.

Overall, look for the USA to continue to improve but for the uncertainty in Europe to cause challenges, both here and abroad.

About the Markets

The markets ended the week and the year 2011 with very little to show for it. The annual returns for The Dow Jones Industrials [ +5.53%], the S&P 500 [0.00%] and the NASDAQ Composite [ -2.52%]  were mixed for the year. The S & P 500 ended the year with a total return of just two percent including dividends. Past performance is no guarantee of future results. Indexes are not available for direct investment.

The P/E multiple for the S & P 500 ended the year at 13.5 times trailing twelve months’ earnings.  That means investors were willing to pay about $13.50 for each dollar of the average company’s earnings, down from $15.80 at the beginning of 2011.  Also, we still have about $3 trillion in zero-yielding money market funds, another falling barometer of investor enthusiasm.

Treasury rates also declined. This probably is the result of the Treasury’s “Operation Twist” and the inflow of foreign capital seeking a safe haven in these troubled economic times.  For the year, the yield on 30-year government bonds was down -1.44%, indicating a sharp flattening of the yield curve.

Mortgage rates were unchanged for the week, but fell almost a full point lower for 30-year and 15-year loans during 2011.  Unfortunately, it didn’t help the housing sector, which is still burdened by falling prices and an ongoing wave of foreclosures.  It’s estimated roughly 25% of homeowners are “underwater” – meaning their homes are worth less than their current mortgage.

The U. S. dollar did gain strength versus the Euro (€) by only 4 cents compared with the beginning of the year.  Despite all of our problems, foreign investors still view the U. S. as a safe bet for their money and will likely do so until Europe mends its ways. Europe has to fix their sovereign debt and banking issues before the economies pick up.

Crude oil prices were just under the $100 benchmark, but most analysts predict the price will rise higher in coming months.  Even so, gasoline prices fell quite a bit over the last few months. This is especially surprising given all the disruption in the Middle East this year.

Bottom Line: Don’t expect 2012 to be much better than 2011 until Europe solves its problems. That is going to take some time and hardship before it stabilizes. We saw high volatility and low returns – never a good combination for an investor’s confidence. And despite strong corporate profits and strengthened balance sheets, stock prices remained flat after sixty seven price changes during the year.  So-called “high frequency trading” seems to have taken the place of long-term investing. Is this market timing on steroids?

Here are some predictions for 2012. We are probably going to see the following:

(1)  corporations reluctant to invest, grow, and hire

(2)  slow economic growth

(3)  continued high unemployment

(4)  Congressional gridlock and animosity

(5)  presidential election uncertainty

(6)  volatile commodity prices

(7)  stagnant housing sector

(8)  continued pressure on Medicare and Social Security

In this environment, all that can be done is to hope the markets go higher, soon.

Financial Fact of the Week

Count your blessings!  According to the U. S. Agriculture Department, the Supplemental Nutrition Assistance Program (food stamps) has grown from 26 million recipients five years ago to a record 46 million today.  The U. S. Census Bureau says nearly 50 million Americans are living in poverty, the highest figure since record-keeping began 52 years ago.


This information is compiled by Guy Baker from an assortment of news feeds including First Trust, Yahoo Finance, Bloomburg and others. This information is intended to be informational only. This newsletter contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Investing involves risk, including the potential for loss of principal. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy.



No Responses to “Looking Back to January 2011”

Leave a Reply