2nd Quarter 2012
July 9, 2012
In the 2nd quarter of 2012, we saw a significant recovery from the lows of last summer (almost 30% increases in U.S. stock indices) until the recent possibility of “Greece 2.0”. The real impetus of the decline in stock prices is, more than likely, a slowing of the U.S. economy. We have just undergone a period of very high global oil prices which almost leads to a slowdown in global growth. This is like a tax on consumers that takes away from purchases they would normally make elsewhere. That being said, what drove the recovery in U.S. stock prices were the below average valuations that were caused by the market sell-off/panic during the summer of 2011. U.S. companies have continued to report record earnings while solidifying their balance sheets, making them an even more attractive long-term investment. Even though we have not seen robust growth, our economy continues to improve. Housing appears to be finding a bottom and we are seeing new home construction pick up for the first time in years. Low interest rates appear to finally be creating demand for home purchases. Home purchases are an important leading economic indicator, because when a family buys a new home they also buy new furnishings, appliances, and will often remodel.
With the dog days of summer upon us, we see temperatures rising along with stock market volatility. What is an investor to do? We can move to bond funds like most of the individual investors are still doing. We can buy a ten year treasury yielding 1.6% for the next ten years, or we can own the leading companies of the world and participate on the growth of their business. I hear so many people giving up on the future of the U.S. and asking where the growth is going to come from. Let’s start with manufacturing; we are seeing a boom in manufacturing in the U.S. being driven by low energy (natural gas) costs. It is estimated that by next year, the cost differential to manufacture in China vs. the U.S. will only be 13%! Every week I read about companies moving production back to the U.S. not only because of the cost, but to regain control of their manufacturing process. Airbus just announced that they will start assembling airplanes in Mobile, Alabama, creating 1,000 direct jobs and another 4,000 indirect jobs. This is a European Consortium – moving production to the U.S. to be closer to the U.S. market. Additionally, a new 3-D manufacturing process that has been developed here in the U.S. has been introduced. This is a new technology that will revolutionize the way we manufacture goods. The process involves taking an item or a drawing, scanning it into a computer, and then “manufacturing” the item. The closest thing to compare it to is a copy machine. This may be the most significant revolution in manufacturing since Henry Ford developed the assembly line.
During the second quarter, you may have noticed a couple of changes we made to your portfolio. We have added Artisan Global Value Fund along with Vanguard Dividend Growth Fund. We added Artisan to replace the Third Avenue Value position we sold in the first quarter of 2012. Artisan is a large company global stock fund run by a pair of managers that have been together for several years. They have been able to achieve above average returns with below average volatility; a difficult combination in the current market environment. The reason for adding a global position at this time is that it will more heavily weight North American companies, and add more foreign positions as things begin to stabilize internationally. The Vanguard Dividend Growth Fund owns all U.S. companies with an emphasis on companies that not only pay dividends, but have increased them each year. We have not completely moved out of foreign stock funds, just reduced our exposure. At this time, we believe the dollar will remain strong in the near future, thus having a negative impact on foreign stocks.
As always, we welcome any thoughts, comments or questions. We look forward to seeing you at your next review meeting.
Daniel P. Michalk, CFP®, ChFC