3rd Quarter Review
Coming off poor 2nd quarter performance, stock markets resumed their upward trend in the 3rd quarter. Bond markets have reversed downward trends and started to level off, ending the quarter with a small gain (although they are still down for the year). To everyone’s surprise the Federal Reserve indicated at their September meeting that they were not going to slow down their bond buying – nearly all markets reacted positively on this news. As we go into the 4th quarter the headlines are focused on a government shutdown and the debt ceiling debate. Behind the scenes, America is benefiting from a resurgence in manufacturing as companies bring jobs back to the States. In this issue of Allgen’s quarterly update we will look at these two competing forces and how we are attempting to protect and grow our client’s portfolios.
Government Shutdown and Debt Ceiling Debate
As we write this article the government is over a week into its shutdown. We don’t want to focus too much on this topic because by the time you read this it may already be resolved. Here are some bullet points that we believe you should know:
– Congress will most likely seek to package reopening the government with a debt ceiling increase.
– We don’t expect to see a downgrade of U.S. government debt by the major ratings agencies.
– The tendency over the last few years is to come up with a short-term solution and deal with the difficult decisions (longer-term budget issues, entitlement reforms and a framework for tax reform) at a later time.
– During the last shutdown in 1995 and 1996 the stock market actually advanced 5%
(Source: James Investment Research)
Manufacturing Resurgence in the USA
The Median Household Income (the average income a household in the U.S. earns per year) has grown very slowly since 2000; but if you factor in inflation it actually has declined (see chart below). For 13 years the average income in the U.S. has been basically flat, while emerging markets (like China) have been increasing at a stellar rate. This shift has made American wages
increasingly more competitive, causing manufacturing companies to consider moving their operations back to the United States from China and other emerging market countries. Another major factor that is helping attract manufacturing back to the U.S. is the gas and oil boom that is occurring domestically. When you combine lower labor costs and lower energy costs with America’s reliable legal system, trustworthy accounting policies and well-developed infrastructure it makes sense to bring manufacturing back to the States. According to the Bureau of Economic Analysis, for the first time since WWII the manufacturing sector has added to U.S. GDP for three years in a row. A “re-shoring” of manufacturing to the U.S. could be a long-term catalyst for increased economic growth in the U.S. since it would put more people back to work. The median household income has recently started to rise and this trend should continue which would lead to increased consumption and again lead to greater economic gain.
In the last few commentaries we have discussed the likelihood of the Federal Reserve starting to taper bond buying; we believe this will eventually be a headwind. Thus far the Fed has been reluctant to stop the stimulus and as long as this easy money policy remains in place we believe the odds favor continued appreciation in the stock markets. Although there could be long-term ramifications for all the easy money (like potential asset bubbles and inflation) for now the party rolls on.
Over the last year we have slowly increased our stock positions relative to bond positions as we believe stocks are better positioned than bonds over the intermediate term. Specifically we have increased our mid and small cap U.S. areas to take advantage of the potential strength in the U.S. economy going forward. While stocks have provided growth potential, bonds play a significant role in protecting capital, reducing volatility and providing income. On the bond side we have shortened maturities, increased our positions in investment grade corporate bonds and high yield corporate bonds, and significantly reduced our positions in long-term U.S. government bonds. We continue to manage risk first in all of our investments, but we have been more actively searching and taking advantage of potential growth opportunities.
Jason Martin, CFP®, CMT, Chief Investment Officer Allgen Financial Services, Inc.;
Paul Roldan, Chief Executive Officer; Chris Damiano, Operation Specialist