We hope you are enjoying your preparations for Thanksgiving Day!
Our last update on October 27th indicated that the significant and rapid rise of the US stock market off the October 3rd lows would most likely result in a pull back over the next few weeks. So far, that forecast has come to fruition with the S&P 500 index declining 7.17% from October 27th through yesterday’s close.
The not-so-super Congressional Super Committee admitted defeat yesterday, confessing they cannot find a way to cut our budget by a mere 6% or so per year. The markets, however, had already priced in the high likelihood of this event. The real story continues to be the mounting sovereign debt problems faced by the European Union, and the reality that we are continuing to observe a slowing of economic growth on a global scale.
Recent consumer data has implied that the US economy may be seeing signs of improvement, however, we advocate using great care going forward. Much of that data is offset by a decline in household incomes and a drop in the US savings rate. Such a drop indicates that consumers are either borrowing or drawing down their savings to pay for their increase in spending.
We track certain alternative data like the U-6 unemployment rate, as measured before changes were made in 1994 by the Clinton administration. The current official U-6 unemployment rate of 16.2% as of the end of October, includes the familiar U-3 unemployment rate of 9% you hear so much about, along with those who have either given up looking for work, or have become under employed over the last 12 months. John Williams, at Shadow Statistics, still tracks the U-6 rate the way it was stated for many decades before it changed in 1994, which includes the official U-3 rate and those who have given up looking for work, or have been under-employed for the last 36 months. The alternate U-6 rate is a staggering 22.9%. Please see the attached graph.
We just added a long maturity US Treasury ETF to our clients’ portfolios, due to our concern that we may be swiftly approaching another “flight to safety” event in the markets. Contrasting 10-year US Treasury yields of about 2% to similar treasuries issued by Euro zone countries yielding from 4% to 7%, it is apparent that US debt is still considered to be the safest place to be right now.
Looking at the short-term, there is growing evidence that we may see a “Santa Claus” rally in the US stock market, as we approach December and possibly January. Our long term forecast indicates we are still in a bear market and we may yet retest the lows of 2009. We will continue to be nimble and make adjustments to our clients’ portfolios to take advantage of market trends, as they become evident.
This Thursday is Thanksgiving Day and it is a uniquely American holiday. Despite much of the bad news we see and hear from one minute to the next, I know I have so many things to be thankful for. I’m thankful that I still live in the greatest country on Earth, despite the political turmoil. I’m thankful that we can actually have a public debate, without being afraid of “disappearing.” I’m thankful we live in a country where the police can actually be held accountable when they lose control. I’m thankful that my children aren’t dying from dysentery, or that I don’t need to sell one in order to feed those that remain. I’m thankful that we can read what we want, say what we want, and pursue the happiness that we want.
So please join us on this great upcoming holiday, as we remember to give thanks for this great country and our many blessings.
From all of us at Brotherton Investment Consultants, LLC, have a great Thanksgiving!
John L. Brotherton, CFP®