During the 1st Quarter, the global economy was calmer. Not only did global stocks enjoy a substantial price increase, the prices of all financial assets improved. In the United States, signs of stabilization have appeared in both the housing and automobile markets, and unemployment claims have improved modestly. Corporate balance sheets and profits also generally remain strong. In other words, the U.S. economy appears to have found a foothold. However, the long term outlook has not changed materially. The economy still requires government stimulus and artificially low interest rates to grow, and the process of reducing government debt is likely to slow economic growth going forward.
In Europe, near term concerns around defaults in Greece and other countries were eased by actions of the European Central Bank (ECB). The ECB lent nearly a trillion Euros to at-risk European financial institutions. Stock prices in Europe improved during the 1st Quarter, but a recession appears likely. The fundamental problems facing Eurozone members remain – lack of economic competitiveness, and a lack of shared vision and policy between governments.
In China, concerns about slowing growth in the world’s second largest economy have caused volatility in global stock prices over the past year. China has the fastest growing economy among major emerging markets and is expected to contribute close to one-third to global GDP growth over the next few years, more than any other country. So far, the Chinese government has successfully managed the tenuous relationship between growth and inflation, but it bears watching.
As the U.S. economy exhibits strength, we have received many inquiries about whether we should add to our investment in U.S. stocks relative to other asset classes. There is reason to be cautious here. It is important to remember that stock prices often do not correlate with the current state of the economy. The best time to invest in stocks historically is when the economy is at a low point and the worst time to invest in stocks is when the economy is at a high point. Today, the economy is somewhere in between.
Further, short memories can be our enemy. In each of the last two years, the stock market started the year well and then experienced a substantial decline. The stock market tumbled in 2011 as we approached the Federal Government debt ceiling deadline. The outcome of that congressional standoff was to schedule automatic cuts in government spending and tax stimulus for January 2013, unless an alternative agreement can be reached. The spending cuts represent a major fiscal contraction, particularly in comparison with the fiscal stimulus that has led us to this point. With a newly elected President and Congress, the uncertainty leading up to that new deadline could easily damage confidence in the stock market. Finally, rising tensions between Israel and Iran, and the resulting effect on oil prices, are a significant threat to global stock prices.
Given all of these factors, we are very comfortable with the asset allocations we implemented in the last six months. Our stocks have appreciated, and our corporate and high yield bond positions have performed well. The structured note we purchased in October has appreciated because it is based on stock prices, while it also maintains a buffer against stock price declines. Our positions in hedged investments and commodities all appreciated in the 1st Quarter, and will likely serve as an important hedge if markets decline. As always, our philosophy continues to support a strategy that combines attractive asset classes with positions that attempt to manage volatility.
The Wagner Wealth Team
*Information provided should not be construed as investment advice and is not meant to be taken as a recommendation to buy or sell. The financial situation and investment objectives of each individual must be considered for suitability prior to any recommendations being made.