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.
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
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.
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 (firstname.lastname@example.org) 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.