We are unable to pick up a newspaper or turn on the television without being hit with depressing economic news here at home and overseas. Bankruptcies by cities and states grow in number each day and bailout requests of entire countries continue to take front page in the news.
While the lingering economic slowdown and high unemployment rate is not a matter of contention, the proposals to get us back on a growth track could not be further apart. The November elections will prove to be one of the most important in our history in terms of which direction our country will head. The choice seems clearly to be either to continue as a capitalistic society with emphasis on job creation via small business growth, or to take the path of a more entitlement based society with government providing most of the job creation and assistance programs.
Finger pointing for our situation can be directed at big business and Wall Street for greed and a loss of morality perpetrated by inadequate regulations or lack of enforcement of current regulations. Blame can equally be given to the expanding entitlement programs that currently have almost one third of all Americans on some sort of government assistance. No amount of acceptable tax increases can even come close to paying those growing liabilities.
Like the European countries currently in debt problems, it is a mathematical certainty that we will be in the same situation if the issues are not addressed now. As with your own finances at home, it’s simply a matter of income versus expenses.
Be sure to let your voice be heard, get out and vote. It’s crunch time.
Over the past couple of years, the anxiety and uncertainty about the economy and our leaders has made the equity markets a feared place for investors to tread. We continue to see net outflows of money from equities going into the safe havens of bonds, cash, and utility stocks. Investors are willing to make nothing (actually losing if a Treasury Note is paying 1.5% and inflation is at 2.5%) just to be out of the terrifying stock market. The Federal Reserve recently had to work on software to be able to compute transactions when the rate they pay will be negative and buyers will actually be “paying” the government for the right to own their debt!
Equity Risk Premium is defined as “the excess return that an individual stock or stock market provides over a risk-free rate of return. This excess rate of return compensates investors for taking on the relatively higher risk of the equity market.” The current ERP or risk compensation to own the S & P 500 over the 10 year T Notes is 6.7%. That is historically fair.
This year to date, the 10 year Treasury has yielded approximately 0.875%. Dow Industrials to date = 7.8%, S & P 500 11.5%, and the Nasdaq 15.9%. This has been one of the quietest rallies in history. The defensive sectors such as the bond funds and utilities sector are at their most overbought levels in the past 20 years. Corporate America, while reducing their earnings projections going forward, are in a very strong financial position and are paying attractive dividends to their shareholders. They remain in a state of “wait and see” as to how the elections play out and the direction they will need to take. Until then, there are way too many uncertainties to move them off their cautious stance.
These past few years have made it quite difficult to determine and plan for a clear direction in allocating assets to any individual sector. We believe that a continued cautious strategy be employed to position assets accordingly across both equities, fixed income, and non-market correlated investments.
Hopefully, soon we will get some clarity in the direction to be taken to get back to the pro-growth, fully employed, proud America that our forefathers entrusted us with.