2nd Quarter 2011
July 30, 2011
We hope everyone had a wonderful 4th of July holiday. After 235 years, this experiment our Founding Fathers called the United States of America has turned out to be an incredible political system. Most Americans do not realize that our system of Government is older than most of the worlds’ governments currently in place. I thought that was an interesting piece of information to recall as we celebrate our independence.
As we look back over the second quarter, it is hard to believe all that has happened. Even though the Japanese earthquake happened in March, much of the economic effect was not felt until this past quarter. On top of that, we have had all of the natural disasters here in the United States (tornadoes, flooding, and drought). And then we had the “PIGS”, (Portugal, Ireland, Greece, & Spain)! We even experienced a six week period of negative stock market returns. What most of us do not realize is with all of these natural and man-made disasters, U.S. equity markets still finished up for the quarter. These stock market pull backs are a normal part of the market cycle. In 2010, we had two sell offs in the US equity markets of greater than ten percent.
The U.S. equity markets are at valuations we have not seen for decades, and we believe it is because the financial crisis is still fresh on investors’ minds. Money has continued to flow into bonds and gold, and investors are looking for safe havens or inflation protected investments. The news continues to be negative while quarter after quarter companies are announcing record earnings. This is the real driver of stock prices- corporate earnings growth. What the media forgets to tell us is we own a small piece of a company when we invest in stocks, not just a piece of paper. So over time stock prices are driven by the performance of the underlying company, not what is in the news today or tomorrow. I know this sounds fairly rudimentary, but I think at times we forget this.
One of the leading drivers of this recovery has been manufacturing and U.S. exports. We are still the largest manufacturer in the world, and, in April of this year, we exported over a $176 Billion in goods and services. One of the realities of all of the manufacturing that has moved to China/India/Brazil is they are creating a middle class that will now be able to buy U.S. exports. The Brookings Institute estimates that by 2015, China will have as many middle class citizens as Europe and all of North America. This is where the real growth in our economy will come from.
U.S. Corporations are sitting on vast amounts of cash they are using to increase dividends, buy back their own stock, buy other companies, or invest other growth opportunities. We have to remember to stay focused on what matters (corporate earnings) and avoid listening to the noise.
Daniel P. Michalk, CFP®, ChFC