The equity market in the US today is down nearly 1000 over the last couple of weeks (as we write this the Dow is down some 300 points or 35 S&P 500 points). The news is claiming this is due to a report on initial jobless claims. This is balderdash. A slight miss on initial jobless claims isn’t worthy of a bad day in the market. What we think is going on is a lot of folks trying to position themselves ahead of the Employment Report due tomorrow morning. The Employment Report is the most volatility inducing statistic of the month and lately has been worse than forecast. So, given the backdrop of weak economic numbers, a weak Employment Report wouldn’t make for a good session.
Although traders may be trying to position themselves before the Employment Report today causing a pullback, the correction, over the last couple of weeks can be attributed to much more. Identifying the specific culprit for the recent pullback is nearly impossible. We can attribute this pullback to a number of issues that have created dismal headlines to say the least. The biggest headline has been the debt ceiling issue. We have watched our politicians battle over the debt crisis we find ourselves in today. Although the recent agreement to raise the debt ceiling may have provided a short term reprieve and US citizens can sleep again at night knowing the US is not going to default on our obligations, the damage of a delayed response and poor leadership from our representatives has caused consumer confidence to decrease and once again investors fleeing to safety.
On top of all the political drama we are also getting smacked with pretty dreary economic data.
• 2Q GDP came in worse than expected at 1.3%.
• Consumer sentiment missed expectations.
• Next week: ISM Surveys, Personal Income, Employment.
• Spain placed on downgrade review by Moody’s.
Bottom line, the US is faced with mounds of debt and we are looking for economic growth to pull us out of this now 11 year period of zero growth on the S&P 500. Although people will argue that the last three years have been a booming economic recovery we are starting to see this slow growth pattern play out in the markets as GDP faced a large downward revision to first quarter real growth. Apparently, the economy grew at an anemic 0.4% annual rate, not 1.9%. This concept of slow economic growth has been predicted by a number of economist and we are starting to see these predictions become reality. This is once again causing corporations and investors to tighten the belt and seek safety.
What do we need to do to the strategies to accommodate these corrections?
At this time LSA continues to stay focused on finding protection in the portfolios. It has always been the hallmark of the portfolios and over the past couple of weeks we have seen the importance of protection play out in the LSA strategies. To give a live example of how the portfolios are holding on let’s take a look at August 2, 2011 when the S&P 500 was off -2.56% how did the LSA Private Client portfolios fair;
Capital Preservation Plus – (0.40%) – 16% of the S&P 500 correction
Income Plus – (0.60%) – 23% of the S&P 500 correction
Conservative Growth – (0.70%) – 27% of the S&P 500 correction
Moderate Growth – (0.80%) – 31% of the S&P 500 correction
Growth – (0.88%) – 34% of the S&P 500 correction
Growth Plus – (0.99%) – 38% of the S&P 500 correction
Aggressive Growth – (-1.26%) – 49% of the S&P 500 correction
Bear Market Entry – (0.48%) – 18% of the S&P 500 correction
(We will report the portfolio moves from today in a report tomorrow.)
The Portfolios as a whole are in line with the downside protection we are looking for. Our suggestion to advisors today is to continue to stay conservative. In time of extreme volatility we don’t need to be making big bets rather we need to stay focused on the bigger concept of winning by not losing. As of today the portfolios continue to operate under that strategy.
There have been a lot of people whom have turned bearish. Today’s edition of the American Association of Individual Investors sentiment survey shows that 49% of their respondents were already bearish. That is a high number. It could get worse for a week or two, but more likely this is the end of this correction rather than its beginning.
Below are some additional thoughts of the economy.
We now assess a weaker consumer outlook for 2011 given weaker hiring and income expectations, falling home prices, and our concern that consumers may hunker down more in the face of risks and uncertainties. Some may certainly be concerned with questions such as: What will happen with the U.S. debt and deficits?
Second Quarter 2011 will look particularly weak given supply disruptions that held back auto sales in particular (fell below the 12 million rate in May from a bit over the 13 million rate previously) and may overstate the economic slowdown.7 Imports from Japan fell in April. Overall consumer buying plans for autos did not drop, but instead Japanese auto companies lost market share. Average selling prices were higher which indicates to us a lack of supply was likely the driver of market share loss and not reduced demand.
Growth upside risks: We believe the Federal Reserve’s growth outlook for the second half of 2011could prove to be too conservative. Despite weak job growth in Q2, hours worked actually still went up fairly solidly for the quarter, which does drive some growth in aggregate income. Financial assets are up YTD, and more companies are bringing back 401(k) matches dropped during the recent downturn. Economists only moved to cut 2Q11 expectations as the Japan supply disruptions started to flow through. We have already had a period of data that was weaker than expected, so expectations have been lowered.
Growth downside risks: Fed policy errors, uncertainty and/or jobs slowdown, and housing are the main risks. If Greece were allowed to default on its debt in an unstructured way, it would be very disruptive to the global markets; however European officials understand this and should continue to work on a negotiated solution, where even the most aggressive plans that involve private bondholders would look for participation in new longer maturity debt, not write-downs on current holdings. If the U.S. Congress cannot strike a deal to start addressing deficits markets may lose confidence. In contrast, we are more optimistic about a “down payment” on future deficits with an agreement to some spending cuts. We believe a full solution will likely take longer than August, but a “down payment” would likely hold the rating agencies from downgrading U.S. treasuries. There is a risk that businesses and consumers further hunker down because they are not sure if things are going to keep getting worse. We believe that despite some slow down; Consumption (PCE) still grows around 2.25%. If the jobs market continues to weaken or home price declines look more extensive, we would re-evaluate our outlook. Lastly, we think continuing Mid-East unrest may send oil prices up further.
Volatility continues to be a factor and until we work through some of these economic issues we need to stay conservative and preach the good word of protection.