By the time you read this newsletter, 2010 will be cast upon the dustbin of history, Auburn will be the national football champion, and President Obama will be dealing with a very different Congress. As I mentioned in the fall newsletter, the consensus was the House would go to the Republicans and the Senate would remain in Democratic hands. This scenario played out exactly as anticipated, and you might think a couple of years of center to right policy could be expected.
Well, if the only bipartisan effort of 2010 completed by the lame duck Congress is any indication of the future, it looks like long term fiscal stability is still the last issue of importance in Washington. In this compromise, according to Thomas Donlan in a Barron’s editorial, “President Obama and soon-to-be House Speaker Boehner agreed to settle their policy differences by giving each other what he most wanted. The President received a temporary extension of long term unemployment benefits and a temporary cut in the Social Security payroll tax; Boehner received extension of all the tax cuts enacted temporarily back in 2001-03 and an assortment of temporary tax credits for business. Economists familiar with American political behavior note that neither side gave up any cherished spending or tax breaks; both sides compromised at the expense of long term fiscal stability.” The University of Maryland’s Peter Morici bluntly stated, “Instead of each side getting half of what it wanted, Washington feasted and everyone got everything they wanted and more”. Welcome to 2011!
Despite a difficult economic environment coined “The New Normal”, the markets enjoyed a very good year. Upon further study I learned the “New Normal”, which I suppose replaced the “New Paradigm”, isn’t such a novel concept the way it was used by Pimco Bond guru, Bill Gross, to describe what he saw as a period of extended slower growth, smaller asset returns and narrower profit margins than in decades past. The “New Paradigm”, for those of you who may have missed it, or forgot about it, was a term coined back in the days of the dotcom mania. The idea was profits were no longer as important as the business concept itself. We all know where that brainstorm led us.
As it turns out, the term “New Normal” may be as old as hard times itself. Consider this quote from Business Week: “In 1939, a decade into the worst economic slump in American history, New York City Mayor Fiorello La Guardia remarked: ‘We must realize this is not a temporary depression, but a New Normal and adjust ourselves accordingly.’ That year, New York’s Central Park was filled with people living in tents and the world’s tallest tower had so many vacancies that it was nicknamed the ‘Empty State Building’. Normals seem permanent. They never are.”
Nothing has been normal about the markets the last three years, and 2010 was no exception. The Dow Jones Industrial Average* ended the year at 11,577.51 which is an 11% gain. The S&P 500* closed at 1,257.64 for a 12.8% increase, while the NASDAQ* finished the year at 2,652.87 for a 16.9% gain. Since the average annual gain for the S&P 500* between 1926 and 2009 was 9.8%, one could say this was better than a normal year for the index, and much better than was anticipated just two years ago.
So, Happy New Year to you and remember, the markets can be gut-wrenching at times, but with a diversified and unemotional approach they can also be very profitable. Thanks for your continued confidence in me.
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| Gold closed at $1,420.55 per oz. for 2010. That’s a 26.7% increase for the year. The graph above shows the history of gold from 1971 to the present. Caveat emptor???? THE CHASM BETWEEN FEELINGS AND FACTS A recent Bloomberg poll conducted in October 2010 found that 2 out of 3 likely voters in the November midterm election said that taxes had gone up, the economy had shrunk and the billions of dollars lent to banks as part of the Troubled Asset Relief Program (TARP) would never be recovered. The most significant finding about the poll is the dichotomy between belief and reality. The facts are that since 2009, Congress and the Obama Administration have cut taxes by $240 billion and growth has continued uninterrupted in the US and most major economies since the recession ended in June 2009. Furthermore, the Treasury expects a $16 billion profit on the money lent to the banks during the TARP rescue. They must have polled people who don’t read this newsletter! THE POLITICAL AND ECONOMIC OUTLOOK & MORE As I mentioned in the Market Watch segment, there is a new Congress in Washington. With the House and Senate controlled by different parties, gridlock is a possibility, which a cynic might say could cause Congress to do nothing, and that would be a good thing. I have to admit I’ve uttered those exact words, especially when I get frustrated with the direction of government. After the deal on taxes and unemployment it does seem like the cynic’s scenario might be preferable. However, being the optimist I am, I think this just might be a time when some productive action could be in the wind in regard to entitlement programs, taxes and budget deficits. It also helps to add some perspective to the problems we currently face as a country. To do that, let’s look at another Bloomberg poll conducted in September 2010 which revealed that, “77% of global investors expected the European monetary union would crumble and at least one struggling government would default, all despite a $1 trillion euro zone backstop. Greece and Ireland may have stared into the white light of fiscal death, but they were yanked back to earth by their neighbors, wounded but without default”. Many people are concerned about the fiscal condition of some of the states in our own union. I had the chance to hear St. Louis Federal Reserve President James Bullard address the financial health of our own states against the backdrop of the conditions in Europe. His response was enlightening as he remarked,” There is no imminent crisis with any US state as in Europe where Greece and Ireland were borrowing 100% of GDP. US state’s borrowing is more like 10% of GDP. In the US it is more about making policy decisions like lower spending, higher taxes or both”. With spending and deficits at the state and federal levels in the crosshairs of many in Congress, and the Obama Administration at least feigning a move to the center, perhaps there may actually be some headway made toward fiscal sanity. Well, one could hope! As we enter 2011, it helps to be aware of the problems we face as a nation. There are many people concerned about the unprecedented monetary interventions, and the staggering debt load of the government. The extraordinarily low interest rates we have now will need to be increased, but the economy, while improving, is not growing at a level that can even begin to bring the unemployment rate back down to acceptable levels. While energy and food prices are rising, the impetus for major inflation, wage growth, has no traction. So I think for now, interest rates will stay low and inflation will remain tame. The Fed will have to monitor this closely and act decisively if growth accelerates. * THE S&P 500, THE DJIA AND THE NASDAQ ARE UNMANAGED INDEXES THAT ARE WIDELY USED AS INDICATORS OF MARKET TRENDS. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. THE PERFORMANCE OF THESE INDEXES DOES NOT REFLECT FEES AND CHARGES ASSOCIATED WITH INVESTING. IT IS NOT POSSIBLE TO INVEST DIRECTLY IN AN INDEX. DOLLAR COST AVERAGING THROUGH A SYSTEMATIC SAVINGS PLAN IS AN EXCELLENT WAY TO BUILD AN ACCOUNT WITHOUT A SIZEABLE INITIAL INVESTMENT. SAVING A PORTION OF OUR PAY EACH MONTH IS VERY IMPORTANT. COMPANY SPONSORED PENSION PLANS ARE ONE METHOD TO SAVE AND SHOULD BE USED FOR RETIREMENT. OTHER SYSTEMATIC INVESTMENT ACCOUNTS, SUCH AS ROTH IRA’S, TRADITIONAL IRA’S, COVERDELL ACCOUNTS, 529 PLANS, BROKERAGE ACCOUNTS AND ANNUITIES CAN ALSO BE OPENED, AND DEBITED DIRECTLY FROM YOUR CHECKING OR SAVINGS ACCOUNT. FOR MORE INFORMATION, JUST CALL TO SET UP AN APPOINTMENT. REFERRALS ARE ALWAYS WELCOME. COMPANY INFORMATION Investment Advisory Services offered through: Jersey Benefits Advisors P.O. Box 1406 Ocean City, N.J. 08226 Phone: 609 827 0194 Fax: 609 861 9257 Email: kaighn@jerseybenefits.com Securities offered through: Transamerica Financial Advisors, Inc. A registered Broker/Dealer 570 Carillon Parkway St. Petersburg, FL 33758-9053 800-245-8250 Member FINRA & SIPC Transamerica Financial Advisors, Inc. is not affiliated with Jersey Benefits Advisors. Third Party Administration and Insurance Services offered through: Jersey Benefits Group, Inc P.O. Box 1406 Ocean City, N.J. 08226 Phone: 609 827 0194 Fax: 609 861 9257 Email: kaighn@jerseybenefits.com Email: Billcola@yahoo.com All opinions expressed in this newsletter are solely those of John Kaighn and Jersey Benefits Advisors. LD39315-01/11 |
