The strongest of all warriors are these two — Time and Patience.
Mid-year is the perfect time pause, take a look back to review this past year and to see what the road ahead may bring.
One year ago on July 14, Barney Frank, the chairman of the House Financial Services committee said that “Freddie Mac and Fannie Mae are fundamentally sound. I think they are in good shape going forward.”
Then on Sept. 7, Hank Paulsen, former U.S. Treasury Secretary, announced a plan for government take over of Fannie Mae and Freddie Mac. The Treasury received $1 billion of preferred stock in each company, warrants for 80 percent of common stock and pledged up to $200 billion to cover potential mortgage defaults. That $200 billion pledge has since been doubled to $400 billion (source: Wall Street Journal).
National unemployment rate of 9.50 percent (Department of Labor). Good news is that jobless claims have been slowing down since March.
Core inflation, excluding energy and food, is below 2 percent year-over-year.
Government debt is up 11 percent to exceed $11 trillion.
Consumer confidence is down in June after rising the prior three months.
Short-term interest rates relatively stable; long-term rates have begun to rise.
Sales of existing homes increasing and price rate decline slowed. Higher long-term rates and lower prices bring buyers to the table.
The “VIX” (Volatility Index of the S&P’s 500) has fallen to its lowest level since Lehman Brothers failure in September 2008.
As an aside, a colleague and I wondered if there may have been a different outcome for Lehman Brothers if it had been Lehman Sisters instead; we’ll never know, but it’s something to ponder at the very least, but I digress.
Is it over yet?
These reports may indicate that the worst of the decline is behind us, but don’t confuse this with recovery quite yet. Consumer spending is still on the low side for several reasons:
A. There’s still a weak job market;
B. Gasoline prices are inching up again;
C. Lenders are actually qualifying borrowers based on projected ability to make payments.
As we approach a bottom in the economy expect mixed economic data. How the information is perceived and acted upon depends on subjective reactions to objective information, which isn’t always the best mix for logical decision making. We know that investor behavior often defies logic. Another way to look at this is that for every seller there is a buyer and they both believe they are right.
A recession caused by a financial crisis tends to be more severe and lasts longer with a very gradual recovery because over extension of credit to purchase goods and services was a big part of the problem. It will take time to work through our financial difficulties, and in this case time is a dirty four letter word.
The fiscal bailout/stimulus should provide some support. The trick is to find the right balance between growth and saving in order for long term rates to continue to rise at just the right amount. Otherwise higher rates could put a scare into the economy and slow down or halt a recovery.
The Federal Reserve is purchasing Treasury Bonds with the design to keep interest rates low. To understand this, think about how you would be impacted if interest rates were to start to rise if you had $11 trillion in debt; you can see why they may want to keep rates low for the time being. Still, Treasury yields are likely to rise along with confidence in the economic recovery. The markets are complex and much is still to be revealed. Let’s not underestimate the resilience and ingenuity of our country. You’ve been through what for most of you has been the worst financial crisis of your lifetime. Your financial future matters and you don’t need to face it alone.
Darcie Guerin, Financial Advisor & Branch Manager, Raymond James & Associates, Inc. located at 606 Bald Eagle Drive, Suite 401, Marco Island, and FL 34145 provides this article. If you have questions please contact Darcie Guerin via e-mail at Darcie.Guerin@RaymondJames.com. Phone (239) 389-1041, toll free (866)-343-0882 or at RaymondJames.com/Darcie. Past performance may not be indicative of future results.