Second Quarter 2011 TPWC Report
July 13, 2011
The second quarter of 2011 was punctuated by the Japanese tsunami, fear about Greece, and the threat of a political default by Congress. Adding to the worry was the report that the overall economy was growing at less than 2% per year. During the quarter a spike in oil and food prices dampened the hoped-for surge in the economy further. Rather obviously, if people are spending more money on food and fuel, they are likely to spend less in other areas, and they did!
Underneath all of this relatively temporary turbulence, the American consumer is still hard at work paying down the personal debt load. When things appeared to be stable and “normal”, meaning before the financial crisis of 2007-2009, Americans were very confident that their net-worth and income would be generally rising into the foreseeable future. Here in 2011, that attitude has shifted to the far more pessimistic view that bad things have happened to other people and bad things could happen to me!
We live in an interconnected world. I don’t think that very many of us considered that a Tsunami hitting a relatively small section of the Japanese coast would have had a serious effect on the American economy, but it did. Factories in the affected areas were the prime or sole producers of a host of small but vital components in automobiles, computers, airplanes, and more. To the degree that those vital components were not available, manufacturing all over the world ground to a halt. Car sales dropped significantly for lack of small, high-quality, fuel-efficient cars at a time when gasoline prices were spiking. Combine that shortage with the underlying belief that prices will probably be lower in the future (deflationary thinking) and people will simply put off that car purchase, waiting for the right car at a lower price.
There was yet another surprise that appeared at the end of the quarter. The typical, reasonably balanced portfolio came out at a near-breakeven value from where it was three months before. That same performance was reflected in the mix of broad indexes. The Dow Jones Industrial Average was ahead about 1.4% while the S&P 500 Stock Index was down about 0.4%. The Morningstar Diversified Emerging Markets Category declined about 0.87%, while the Domestic Mid-Cap Value Category declined about 0.79%. In the end, it was the Intermediate-Term Bond Category that kept us above water as it had a total return of 1.84% for the quarter.
In short, the various asset classes behaved pretty much as they should in the face of bad economic news. The long-term asset appreciation classes dropped in the face of less than expected growth while the asset protection classes cushioned those losses. The good news in all of this continues to be that corporate earnings appear to be holding up at levels generally well above what was expected. In the end, stock values reflect earnings. If corporate earnings rise the market will follow, sooner or later.
Exports continue to shine and while the growth in manufacturing output is slowing, we are still hitting monthly records for the dollar value of manufactured goods in these United States of America. Much of that manufacturing is being exported and we remain by far the largest exporter on the planet.
As the second half of the year gets underway I am optimistic. As a nation, our savings, both in the form of cash and in things like 401(k) retirement accounts is at an all time high. Once we get some reasonable degree of certainty about the future of taxes, federal budgets, and the status of the fiscally troubled nations in the Euro-zone I suspect we will see a lot of pent up demand take hold and growth that will shock most people.
As always, if you have any comments or questions, don’t hesitate to contact us!
Jeff, Jake, and the team at The Personal Wealth Coach®