While driving around Naples the other day, enjoying the Christmas decorations, it dawned on me why I’m feeling so much more festive this year than I did last year; last year, we’d just experienced near economic collapse; no wonder I felt like the Grinch at times. What a difference a year makes
So here we are, still standing. Take a moment to congratulate yourself for making it through the year. We’ve had the opportunity to revisit some simple back-to-basics concepts and learn a few lessons along the way.
Speaking of back-to-basics, as a kid, I loved Bonomo’s Turkish Taffy; vanilla was my favorite. You could pull and stretch the taffy to almost any length, or you could freeze it and crack it into tiny pieces. Funny how visualizing Turkish taffy makes me think of the U.S. dollar today. Hmm, that might be worth exploring.
Government intervention in credit markets is recognized by many as the reason we avoided ruin. When the global credit markets froze last year, instead of continuing to stretch things out, there was a moment of clarity and the game stopped. We were frozen out; the spending bubble had burst.
On some level, we all knew that the party couldn’t go on indefinitely. Much of the economic climb hinged on the premise that housing prices would never go down. Well, they did and there may continue to be losses in real estate. We’re told that the employment market is stabilizing, yet unemployment will probably remain high because job growth lags in our current economic recovery. Time will be the great healer.
The crisis did prompt us to pay attention to our household balance sheets. Corporations are being forced to do the same. Again, on some level, we knew that the day of reckoning would occur. The bottomless punch bowl was removed from the table, or to put it another way, easy money for consumer credit has declined.
The system is in a way protecting us from ourselves by making it more difficult to spend more than we actually have. We’re taught in school that every action has an opposite and equal reaction, so while we’re spending less, we’re saving more, in an effort to rebuild nest eggs.
Saving is good, yet at the same time it takes money away from consumption that could otherwise fuel growth. This is a negative economic benefit of government stimulus. Consumer spending makes up more than 70 percent of our Gross Domestic Product (GDP). Statistics from the U.S. Department of Commerce show that we’re still cutting back. Frugal is in, conspicuous consumption is out.
The “deleveraging” continues, which is not all bad. In simple terms, this is the process of reducing debt. The goal is to reduce debt to a point where income levels are able to service that debt, as well as provide for savings and consumption. Debt loads had soared and income didn’t keep pace. Therefore, there was no chance for real wealth to grow. The economic recovery process will take time, time and more time. It’s like mopping up spilled milk; it takes time to absorb the mess.
Loans are more difficult to obtain. According to Money magazine, three-year annualized loan growth rates were 9.6 percent before the crisis, and now that number is down to 1.8 percent. Banks are holding on to the cash that taxpayers funded to improve their balance sheets and have increased their reserves twentyfold.
Businesses are doing the same thing by cutting back and not hiring new workers, which explains the unemployment situation. Much of the earnings “growth” we’ve seen is actually a result of reduced expenses. Layoffs and plant closures reduce expenses and “improve” the bottom line, but there’s little or no real sales growth.
At the time of this writing gold continues to reach new highs, while stocks are still more than 50 percent below their 2007 highs. Or another way to look at it is that the S&P has recouped close to 50 percent of its losses. With all this information, it’s up to individuals, with the guidance of their trusted financial advisors, to decide if the glass half full or half empty.
A major issue in the economic downturn was the dramatic loss in confidence during the panic of a year ago. It takes a long time for that confidence to be restored. Time takes time. The road to recovery will be long. It will take years to generate the number of jobs lost in the recession. In the first quarter of the year, the economy appeared to be in free-fall. Private sector payrolls fell an average of 695,000 per month, a frightening pace. In the third quarter, the pace of job losses slowed to a 197,000 average, still high by historical standards, but less than the pace at the start of the year.
The American Recovery and Reinvestment Act of 2009 (ARRA) wasn’t billed as a cure-all that would magically restore the economy to where it was before the crisis. The White House, the non-partisan Congressional Budget Office, the Federal Reserve and other interested observers clearly saw that the stimulus would only minimize the downside, giving the private sector a chance to regain its footing. The unemployment rate is higher than projected, but that’s only because the downturn was more severe than estimated.
Some say the stimulus should’ve been larger and included more aid to the states. Or, it could have contained more direct efforts to create jobs and focused more aid to small businesses, which typically play an important role in an economic recovery and have been severely restrained by the tightness in bank lending.
One thing I do know is that no one can predict the short-term swings in the market. Keeping a long-term perspective, aligned closely with your personal investment goals continues to be crucially important. Invest accordingly.
Darcie Guerin, financial advisor and branch manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145, provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in the Southwest Florida area for 2009. If you have questions, e-mail her at Darcie.Guerin@RaymondJames.com or call 389-1041, toll free (866) 343-0882 or visit RaymondJames.com/Darcie. Past performance may not be indicative of future results.