Q3 2012 Viewpoint

Q3-2012 greets us with a murky picture domestically and globally, which I will delve into later in this missive.

The second quarter of 2012 has passed not a moment too soon in my opinion. In previous correspondence, I suggested the first quarter advance may be nearing its upper limits and that I would lean more towards a conservative bias in the months ahead. This assumption proved out, as the S&P 500 declined measurably from the April second close of 1419 to the June first low of 1278 (minus -9.9%) before stabilizing. Nothing stood out as a material disruption that would send equity markets on a downward spiral, particularly after a very promising Q1. My guess is that shadows over Europe’s sovereign debt burden, accelerated U.S. deficit expansion, and anxiety about the expiration of tax cut extensions were more than enough to send stocks plummeting.

Key catalysts offsetting bearish sentiment and providing a lift for the markets in June include: favorable Greek elections (with the New Democratic Party being elected), stimulative rhetoric from Federal Reserve Chairman Bernanke indicating an extension of Operation Twist (a continued purchasing program of mid to longer term treasuries), a softening by European leaders on stated austerity steps and ECB’s concerted decision to provide Spain $125 billion to ease the country’s banking dilemma. These actions, at least for the moment, have improved investor spirits by lifting risk assets.

Short and intermediate term fixed income assets were allocated to selected accounts during the quarter, thus increasing interest yield that is virtually non-existent in cash and cash equivalent instruments.

Dark Clouds

  • During the 2007 to 2010 period, family income fell 7.7% from $49,600 to $45,800, and median family net worth declined 38.8% from $126,400 to $77,300. The consumer (comprising 2/3rds of our nation’s Gross Domestic Product) has been seriously impaired financially. These facts illustrate inertia limiting a normalized economic growth rate – Federal Reserve Board’s Survey of Consumer Finances
  • Unemployment remains at 8.2%, with the Private sector providing 80,000 jobs in June, while the Government cut 4,000 –Bureau of Labor Statistics
  • GDP growth slowed to 1.9% – Bureau of Economic Analysis

Silver Lining

  • Historically low interest rates – 15 year mortgage at 2.89%
  • Housing Market – Builder sentiment highest since May 2007
  • Gasoline Prices – Down 17%

The Presidential election is four months away, looking to be anybody’s horse race. As of this writing, the Gallup Poll has Obama leading Romney by 2 points; the Rasmussen Poll has Romney over Obama by 1 point. With the Republican National Convention in August fast approaching, media hype surrounding the election is sure to be unrelenting. Both social and economic issues will be debated, argued and vetted for every American voter to decide who they will pick to be the United States’ 45th President. The golden ticket to the Oval Office remains the economic growth and jobs, jobs, jobs.

On a different note, the 2012 Summer Olympics in London are truly something to be optimistic about. Our country’s brightest athletes have committed themselves and trained their entire lives to make the U.S. Olympic team. Now they will get the chance to compete against the world’s best in their chosen discipline for an opportunity to win the Gold Medal. In August, I, your humble money manager, will be donning my trunks and sneakers to race in the inaugural New York City – Ironman; wish me luck – I’m going to need it!

William “Chip” Corley, MBA, RFC
Founder & CEO
First Discount Brokerage