Economies Are Rarely Perfect

Posted in: Economics, General, Stock Market, Thought of the Week

The most prosperous investors do not achieve success by always being right, but rather they do so by being able to recognize and accept when they are mistaken. Our Investment Committee remains very bullish on the overall direction of the U.S. economy and equity prices over the next several years. Having said that, they must regularly inspect markets to determine where potential risks may lie so that they can properly position their portfolios. In order to maintain this impartial approach to investing, our Investment Committee must conduct rigorous analysis to identify the positive aspects of our economy (“tailwinds”), and then weigh them against the negative ones (“headwinds”).

At the moment, there are several headwinds in our economy such as:

  • Unemployment: Small businesses are not hiring due to the uncertainty of the future of healthcare costs, and several people are also leaving the workforce altogether because they cannot find a job.
  • Obamacare: The administrator’s healthcare laws are now in effect, and we are not sure exactly how they will impact our economy going forward. Costs are almost sure to rise and will negatively impact the wallets of consumers and companies.
  • Uncertainty: Short-term traders may create volatility leading into the elections, and to make matters worse, the Fed will conclude its third round of Quantitative Easing in October.
  • U.S. Government Debt: Our government continues to spend like drunken sailors, and political gridlock in D.C. has kept congress at a standstill for close to five years now.
  • Global Political Unrest: We are witnessing unrest in the Ukraine, Palestine/Israel, Syria, Thailand, and many others. These events are nearly impossible to predict, and more are likely to erupt over the next decade.

The next step is to quantify the tailwinds to the economy as well as their duration. Here are a few tailwinds that our Investment Committee believes will drive our economy forward for the next decade:

  • Consumers: Consumer spending comprises 70% of our economy, and confidence is strong for high-income consumers who spend most of the actual dollars in our economy. Equity portfolios, housing prices, and wages are rising which will all likely continue to fuel more spending.
  • Energy Independence: Our Investment Committee estimates that the U.S. will be the world’s largest energy producer in two years and will no longer depend on importing oil from the rest of the world. Cheaper domestic energy costs attract companies from across the globe to set up factories, which means more demand for U.S. workers, which then translates to more consumer spending and tax generation.
  • Manufacturing: Our energy and electricity costs are the lowest in the world and wage gaps with countries like China are now closing and making the logistics of managing production 12 times zones ahead less attractive. Simply put, global companies are now viewing the U.S. as a prime location for manufacturing.
  • Deleveraging: Companies and consumers have shed their debts and balance sheets have never been stronger.

Although there are negative forces within our economy, our Investment Committee believes that the tailwinds are not only stronger but will persist for much longer than the headwinds. The lesson here is that waiting for all headwinds to dissipate will typically prevent an investor from realizing most of the gains in an economic expansion. Economies without headwinds are usually those that are peaking or have peaked. Our Investment Committee strongly believes that we are several years away from a top in the economic cycle and remain confident in their forecast for a slow and steady rise in equities over the coming years.

Read this week’s Thought of the Week to learn more about where our Investment Committee believes the economy is heading.

Click Here for the Weekly Thought

As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.