Archive for plow horse economy

Market Brief – July 2016

Posted by Koenig Investment on
 July 28, 2016
  · No Comments

We’re in the midst of 2016 second quarter earnings releases and I wanted to share with you the picture of the U.S. economy that is becoming clearer as companies release data.  Overall earnings figures are a bit better than expected.  In general, companies made more money last quarter than most analysts expected.  The consensus amongst most analysts is for a better than expected second half of 2016 than originally noted in January.  Both plow horse and tortoise metaphors are common in reports as they sum up thoughts on the current state of the economy.  While this often makes for bland reading and tame headlines, it is good news that should be welcomed as slow growth means less volatility in how companies operate.  Companies that are growing slowly and adding jobs at low, steady rates are less likely to overproduce and need to cut those jobs in a hurry when facing some contraction.  This lower volatility within operations helps keep the company, and the economy as a whole, chugging along a slow growth path.

There are several data points analysts are pointing to as they upwardly revise their expectations for the rest of 2016.  Unemployment is decreasing, year over year retail sales are up, housing starts continue to increase, and average worker pay – a previously worrisome weak spot in the recovery – is increasing.1  In fact, the current economy is basically meeting the definition of full employment.2  The one figure that has been noted again and again in these analyses is the ISM Manufacturing Index.  This index is a survey of purchasing managers around the country and tends to quickly reflect any changes in employment, production, inventories and new orders.  This index rose from 51.3 in May to 53.2 in June.3  Historically, such rises indicate a period of economic growth.  Lastly, investors are largely bearish at the moment.  The contrarian view is often correct as we do typically see a rising market when investors are pessimistic and expect a pullback.  The combination of all this data points to an economy continuing on a path of slow, steady growth.  While there is nothing especially exciting to report, this should nonetheless be welcome news embraced by the average investor seeking portfolio growth and lower volatility.

 

 

  1. http://www1.realclearmarkets.com/2016/07/27/fed_policy_not_in_tune_with_data_181382.html
  2. http://money.cnn.com/2016/05/23/news/economy/us-full-employment-williams/
  3. https://www.instituteforsupplymanagement.org/ISMReport/content.cfm?ItemNumber=30524

 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different.  The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties.  Individuals are encouraged to seek advice from their own tax or legal counsel.  Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.  Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

February 2014

Posted by Koenig Investment Advisory on
 May 9, 2014
  · No Comments

Plow Horse Economy

The mainstream financial press has been inferring that 2014 will be a real improvement for the U.S. economy. I think the data we’re seeing so far is more indicative of a plow horse economy—slow and steady. While many companies are reporting nice profits for the latter half of 2013, their guidance for 2014 is best termed as “cautious.” Companies are generally expecting to see positive earnings growth for the coming year, but it is modest growth they are projecting.

Two months (December and January) of weaker employment reports and a slowdown in both manufacturing and housing suggest the economic takeoff many pundits have been predicting for 2014 is wishful thinking. Weather-related issues may be causing some of the slowdown, but broad data seems to point to issues beyond weather. This does not mean the U.S. economy is headed for another recession, but rather that we are likely to continue to see slow, modest growth.

General Economy

The average monthly U.S. trade deficit figure for 2013 was $39.3 billion, compared to $46.4 billion in 2012.1 A decrease in the trade deficit is a positive for the economy. Decreased oil imports and oil-related exports are clearly making a difference in the trade data. Although trade data has been headed in a positive direction recently, the progress has slowed. Trade exports are a significant portion of GDP.

Auto sales have been a large positive in the U.S. recovery. This is quite a turnaround for an industry that saw near bankruptcy for giants Chrysler and GM in late 2008 and early 2009. Recent data is showing some slowing in sales. This is to be expected. The market saw pent-up demand that has now eased.

Unemployment continues to ease. The past year saw the 3-month average for year-over-year private sector employment growth hover around the 2.0% mark all year.2 Most Americans would like to see greater growth in employment. The numbers do show jobs being added within the economy every month. Again, this is not at a robust rate, but it is one more example of an economy that is steadily improving, albeit slowly.

Federal Budget News

The Congressional Budget Office (CBO) released its semi-annual 10-year budget outlook in early February. This report shows the deficit shrinking both in raw terms and as a percentage of GDP over the next 2 years before shifting to a moderate rate of increase. Current projections through 2024 show a budget deficit no larger than 2013 in terms of a percentage of GDP. The 2013 deficit came in at 4.1% of GDP. This compares to 6.7% of GDP in 2012 and 8.4% in 2011. Higher taxes and lower spending forced by the sequester both contributed to this lowered rate. For those who think the deficit cuts are all smoke and mirrors, I would point out that 2013 government spending declined 2.3% and tax receipts increased by 13.2%.1

January Effect

Statistical analyses of the stock market show an interesting trend related to activity early in the year. The Stock Trader’s Almanac is known for the maxim “As goes the S&P 500 in January, so goes the year.” While this may seem to verge on fortune telling, there is actually good, mathematically sound reason for this maxim. By the most critical of criteria, the maxim has held true 76.2% of the time for all years since 1950. There have been 24 down Januarys since 1950. Those years then have an average market decline of 13.9% for the entire year. Probability does not mean a situation is set in stone. For example, 2010 saw the S&P 500 decline 3.7% in January yet ended the year with a 12.8% gain.3 However, the multi-decade trend has been that years with negative Januarys are years in which the market does not perform well.

What does this mean for you as my client? I continue to look for companies that I believe are undervalued in the current market environment, including much of the financial sector. My comfort zone remains with master limited partnerships (MLPs), more conservative mutual fund offerings with an emphasis on income, and companies with a high degree of predictability in their earnings. I do expect to see interest rates rise so will continue to look for shorter-term bond exposure and avoid long-term bond holdings.

Summary

I feel the broad stock market got a bit ahead of the fundamentals in 2013. Current price/earnings ratios are in line with historic norms. However, earnings guidance released by many major corporations shows investors should have subdued expectations for growth over the coming year. As has been the case during much of the recent recovery, the U.S. economy is not behaving as a dynamic racehorse but rather as a slow and steady plow horse. While it may not be as exciting as a racehorse, the plow horse economy does serve a purpose and is helping the economic lives of Americans. The levels of growth are not what many would like to see but are good compared to what much of the rest of the world is seeing right now.

Please note that our 2014 ADV does not contain any material changes. Please contact LorrieAnne (lorrieanne@koeniginvestment.com) if you would like a copy of our 2014 ADV Part II (narrative) or the entire 2014 ADV filing.

 
1) Economic Rocket Ship Still Stuck on the Launch Pad, 02/08/2014, Robert Johnson, morningstar.com

2) Bureau of Labor Statistics

3) Briefing.com, 1/31/2014, The Big Picture, Patrick J O’Hare

 
The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a solicitation of the purchase or sale of any securities.

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