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The Great Misconception?

Perhaps we’re missing something. Economists have called our recent hard times the Great Recession, and many call for a double dip on the horizon. But many of the numbers, particularly the ones released just last week, tell a different story.

Let’s start with the bad news. Consumers are still reeling from the credit, market, and political low notes we hit in August. Perhaps that’s why our poor outlook remains. On Friday, the Thomson Reuters/University of Michigan survey  results of consumer outlook fell from 59.4 last month to 57.5 – way off the more positive expectation of 60.2, and the lowest level in 30 years. 

Consumers reported that the biggest reason their finances have recently worsened was due to decreased household income, and 65% do not expect their income to increase in the year ahead.

 (CLICK HERE for CNBC coverage of the consumer sentiment survey, October 14, 2011.)

Then again, perception is about how we feel. In reality, the numbers aren’t all that bad. Last Friday, the US Department of Commerce announced that U.S. retail sales for September increased by 1.1% over August, and 8.1% over September 2010. Car sales also increased, up 0.6% in September and rising at the fastest pace since March 2010.

(CLICK HERE for the US Department of Commerce report, October 14, 2011.)

In job news, hiring was stronger than expected in September, with employers adding 103,000 jobs for the month. That number was bolstered by 45,000 striking Verizon workers who returned to work, as well as jobs added in the construction, retail, and professional/business services sectors. The picture may have looked rosier had it not been for Bank of America’s loss of 30,000 jobs in September, not to mention the ongoing woes of the public sector. As a result of state budget cuts, public schools lost 24,400 jobs across the country and local governments eliminated 35,000 jobs. Furthermore, the United States Army eliminated 50,000 troops as part of its five-year reduction plan.

(CLICK HERE and HERE for CNN’s coverage of jobs reports, October 7, 2011.)

(CLICK HERE for an employment update from Challenger, Grey & Christmas, October 5, 2011.)

To date, this year has experienced a teeter-totter between the languishing public sector (with a net loss of 267,000 jobs) and a well-capitalized private sector (with a net gain of 1.3 million positions). 

America’s corporations may be a bit stingy on job growth, but not on balance sheets. Economists estimate $2 trillion in cash reserves among the nation’s companies. In the first six months of this year, profits of the Standard & Poor’s 500® companies increased nearly 16% more than during the same timeframe last year. The 52-week S&P 500 consensus forward earnings forecast has increased from $96 at the start of the year to $108 (a 12% increase). 

These numbers clearly indicate that corporate profit is climbing much faster than economic growth. However, stock valuations remain priced for low expectations. Equity investors with nerves of steel who are willing to ride out the current volatility may eventually be rewarded. As the Global Investment Committee at Morgan Stanley Smith Barney points out, historically, years that start out with low levels of consumer confidence have witnessed higher than average equity one-year returns.

(CLICK HERE to read at Morgan Stanley Smith Barney’s market commentary, October 2011)

If you would like to discuss the equity allocation of your investment portfolio, please contact us today!


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