Have We Already Fallen Off The Fiscal Cliff?

Ashley Page Picture07/30/12: It is certainly hard to believe that we almost have seven months of the year in the books. As we always do at the beginning of the market week, we take a “look ahead” at a few items that we will be tracking carefully during the week. These are just a few opinions that we have, and as with life, nothing is certain about them.

  1. First of all, here’s a “week-at-a-glance” view of what’s coming up over the next five days.
  2. Beginning today, Treasury Secretary Geithner will meet with European Central Bank President Mario Draghi and German Finance Minister Wolfgang Schauble. On Tuesday, several domestic economic reports are released including: income and spending for June, the S&P/Case-Shiller home-price index for May and the Conference Board’s index of consumer confidence for July. Wednesday brings the release of a Federal Reserve policy statement following a two-day meeting and The Institute for Supply Management issues its manufacturing index for July. Also on Wednesday, auto makers will publish their July vehicle sales numbers. On Thursday, policy makers at the ECB and the Bank of England conclude meetings and data on June factory orders and retail sales for July are released. The market week concludes on Friday with the U.S. reporting on the unemployment rate and nonfarm payrolls for July.

    What does this mean for investors?

    There is a “little bit of everything” coming out this week, but we are particularly interested in Geithner’s meeting in Europe in tandem with the Federal Reserve’s publication of its policy statement. This is just one more example of how highly politicized markets have become, both in the United States and abroad. Simply put, politicized markets tend towards more volatility for investors.

  3. Unfortunately, U.S. corporate profits are increasingly being impacted by current global weakness.
  4. As economies weaken across the globe, U.S. firms are cutting earnings guidance for the third quarter. The ratio of negative-to-positive Q3 forecasts is now the worst since 2001. Up until this point, we’ve had 10 straight quarters of U.S. corporate profit growth; unfortunately, it appears that train may be pulling into the station. In addition to top line revenues being off generally across a wide variety of industries, recent strength in the U.S. dollar is also pounding profits on the exchange rate.Financial Market Outlook

    What does this mean for investors?

    That one of the bright spots in the economy for the past couple of years is growing dimmer. Where companies had not been hiring much, they had been investing in technology and machinery that was further improving efficiencies. If nothing else, this was certainly helping “business to business” sales in the United States. With an economy that is already quite weak, almost at percentage levels where it is hard to argue there is any real recovery at all, what does the market have now to “hang its hat on” with Europe still unresolved and unemployment stubbornly high?

  5. Forget the “fiscal cliff” at the end of the year, slowing expenditures by the federal government are already here and impacting our economy.
  6. Recent economic data shows that long before the fiscal cliff hits, federal spending already is falling off and taking a toll on the recovery. Federal spending has fallen 3.3% in the past year and federal payrolls have lost 52,000 jobs in the past 12 months. These cuts are coming in two places: (1) military spending, and (2) stimulus dollars supporting infrastructure improvements at the local and state level that are now coming to an end. The cuts are especially significant for communities that rely heavily on the military. These cuts are coming at a tough time for the U.S. economy, which has lost steam after appearing to accelerate earlier this year.

    What does this mean for investors?

    Our view is that in the short run, more “pain,” but in the long run, more “gain.” Reduced federal spending combined with less governmental interference in the corporate sector should help rein in huge budget deficits and put the economy on sounder footing.

  7. If the Federal Reserve does intervene in U.S. markets in coming weeks, will it really be that effective?
  8. With long-term borrowing already at record lows, it is unclear how much more borrowing for corporate investment and consumer purchases that a third round of quantitative easing would create. As one practical example, even if the Fed buys mortgage backed securities in this round, its impact would be more limited as many banks have lending criteria that are much more stringent on home mortgages and consumers are hesitant to take on more debt. Simply put, it’s hard to see how much “flow through” impact that another round of quantitative easing would have.

    What does this mean for investors?

    Intervention by the Fed might provide a “confidence kick” to markets that actually helps. However, as with previous efforts, the benefits will fade unless politicians on both sides of the Atlantic use any boost by central banks to spur more long-term, decisive action.

Do you have questions about your portfolio? Please feel free to email me here or call me at (205) 989-3498.

Ashley Page
Senior Vice President
Wealth Consultant


The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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