Slow Growth Grinds On

We end each year with a plethora of fearless forecasts from gurus and sellers of books and newsletters. As we move into a new year, much ink and hot air is expended explaining why or why not certain prognostications did or did not come to fruition.

Dan Sullivan, The Strategic Coach, observed, “Facts are not trends and trends are not certainties, but there are certain trends that are more certain than others.” Gary Miller, CFA, chief investment strategist at Frontier Asset Management in Sheridan, Wyoming, points out three major themes popular with the punditry set. The first is that world economies will grow just enough for corporations to keep making money and that stocks will continue to rise, with the Dow Jones Industrial Average (the Dow) reaching 18,000 or so in a year or two. The opposing theory is dour: stocks will plummet as global economies fall into another debt-driven panic. A third forecast says interest rates must rise (some would say “soar”) because they are so low, causing bond prices to fall and sandbagging investors who thought they were hiding in safe assets.

 Interesting is the fact that there are learned voices on every side of a theory. Who is right? Might we not get some of all of the above, in varying degrees? Theories come and go, markets fluctuate, and sentiments change, sometimes hourly during a trading day.

In the fourth quarter of last year the GDP grew at a weak 0.4% rate, raising fears of another slowdown exacerbated by worries over the expiration of the Bush tax cuts. For the first quarter of 2013 GDP grew at 2.5%, and the stock market responded. With all of the revisions and questions surrounding government bean counting statistics, it seems that our economy continues to grind along with “slo-mo” growth in the two-percent range. Core inflation that excludes volatile food and fuel prices (you know, groceries and gasoline...the stuff you buy most often) chugs along at 1.2%, below the Federal Reserve Bank’s 2% inflation target. This signals that Mr. Bernanke will not take away the easy money punchbowl near term. The benchmark 10-year Treasury note, despite several brushes with the 2% level, stood at 1.669% on April 26, 2013.

The tax increases levied as of January 1 are having an impact, especially the payroll tax hike. Others say that austerity is the problem, e.g., the sequester. Economist Paul Krugman of The New York Times insists that the government is not spending enough and that taxes should be raised. The threat of more tax increases will do little to build confidence among upper income investors and entrepreneurial job creators, those who actually put private sector capital to work to grow the economy. Consumers have been spending, but data indicates they do so by decreasing savings. That is not healthy as we preach do-it-yourself approaches to financial independence in retirement.

 The trend likely to persist is the slow growth pattern. As to forecasts of Dow 18,000 versus a Euro-collapse driven rout, we lean toward the “cautiously optimistic” camp, recognizing that no market goes straight up. The Japanese central bank has moved to depreciate the yen to boost exports. Japanese investors have been pouring money into U. S. 10-year Treasuries, content to get 1.70% or so in an appreciating currency versus a paltry 0.60% in a Japanese government 10-year bond. Yes, interest rates will rise eventually, but in our view, not measurably any time soon. A fixed rate 15 year mortgage can be had for 2.85%, a phenomenal bargain, one that will help to continue the housing recovery. Cheap money is also reigniting building in the commercial and multi-family real estate sectors.

 Gary Miller will tell you that often when some asset class rises or falls, another asset class moves in the opposite direction. When stocks fall, bond prices often rise as the fear factor kicks in. Flexibility in investing may be the key, something to look for in the selection of a money manager. Diversification counts.

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com

Required Disclosure:  Investing involves risk including the potential loss of principal. No investment strategy including diversification can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results.