3rd Quarter 2012
October 1. 2012
The 3rd quarter of 2012 has been uneventful from a market standpoint as compared to the 3rd quarter of 2010 and 2011. We saw most major stock market averages move up by about 5% and a continued slow economic recovery. As always, there are several factors that are helping the equity markets (interest rates, housing, lower energy prices) and some that are hurting it (uncertainty of elections, tax code expiration and fiscal cliff). The remainder of the year will most likely bring additional volatility, so we believe patience and prudence will be in order as we move forward for the remainder of 2012.
There are two items that are not getting much attention in the media but need to be discussed – flows of money into bond investments, and the amount of cash on corporate balance sheets. Since 2007, bond fund and ETF inflows have outpaced equity fund and ETF inflows by a ratio of 6:1. Interest rates are at record lows (1.7% on a 10 year treasury bond) and money continues to flood in to this sector. This almost guarantees a loss if inflation averages 3% over the next 10 years. The Federal Reserve has projected that they will keep short term rates low into 2015, which leaves little room to work with interest rates if we have a slowdown in 2013. We typically have a recession once every 4-5 years, and since the last one was in 2008, we are probably due. The word “recession” brings on many different thoughts and feelings, but the reality is they are a normal part of the business cycle. We cannot predict when we will have a recession, but we can prepare the portfolio for it by remaining balanced and keeping adequate liquidity available. We feel that even if there is a recession in 2013, it would be mild and short lived. The reason for our belief is the second item that is not getting much attention: cash on corporate balance sheets. It is estimated that almost $2 trillion dollars are on corporate balance sheets. At the current interest rates, cash can only remain there for so long before it is either invested in the form of expansion or acquisitions, paid out in dividends or used to buy back stock. Once we move beyond the uncertainties at year end, companies will know the best places to put that money to work which should help the economy improve 6-9 months down the road.
As we approach the end of 2012, it also brings a new chapter for everyone here at Heritage. As you know, we have spent 10 years together as business partners and feel it is the right time for us to make a change. We want to thank you as well as all of our staff that have helped us reach far beyond our expectations. As with any change there is always a bit of sadness, but we look forward to serving you in the future at Heritage and Waterway.
Daniel P. Michalk, CFP®, ChFC