Looking forward to 2011, one might reflect upon the substantial disconnect between stock market results and the overall health of the economy. Sometimes, the factors that influence the market are not highly correlated to the economy. Last year was a good example, and 2011 may also illustrate that stock prices do not march in lock step with economic indicators.
Most economists feel optimistic about the growth of the equity markets in the U.S. They assume that the Gross Domestic Product will grow at a respectable 2.5 to 3 percent. Corporate balance sheets are very strong, and investors are sitting on a healthy reservoir of cash. The Price-to-Earnings ratios are reasonable while corporate profits are expected to rise. The opportunity cost to invest in bonds is high given their low yield. Low labor costs enable employers to exploit talent at favorable wages. U.S. multinationals can increase sales of their products and services in emerging markets. The Federal Reserve has lowered interest rates for Fed Funds to virtually zero, and promised additional purchases of U.S bonds, thus pumping money into the banking system to encourage capital formation, a process the Fed calls Quantitative Easing.
OK, that all sounds great for business! Well, before we get too giddy, let’s address three overhanging problems that will not go away soon. Eventually, these issues may weigh heavily on our economy and our long-term prosperity.
The most daunting short-term issue is the very high unemployment rate. It is estimated that we lost 8.3 million jobs as a result of the financial crisis. Since the bottom of the recession in summer 2009, we have only recovered 1.1 million jobs. Young adults and immigrants are also continuously entering the workforce. At the current rate of job growth, it will be several years before the unemployment rate gets back down to pre-recession levels.
For two years, the unemployment rate has flirted with 10%, which exerts a severe drag on the economy. As unemployment benefits run out, people burn through their savings, 401k plans, and home equity. They eventually need to turn to our already over-stretched social programs to meet basic living essentials, which lowers demand for products and services, and also increases the national debt.
The second short-term problem is the housing market. The back log of inventory of residential and commercial property is at a peak not seen since the Depression. This has killed new housing starts and the many industries that feed off housing. In addition, many home owners are unable to make financial decisions regarding their retirement or relocation because they are unwilling to sell their homes at a lower price or settle for an unacceptable loss. The prognosis for resolving our housing issues is now measured in years, not months.
A third issue which is not often discussed in the public press but is very concerning to retirement specialists is the enormous underfunding of 401(k) plans by the vast majority of Americans. The flat equity markets and low yields of bond markets over the last 10 years have devastated 401(k) account balances. To compound the matter, many employers have cut back on employee-matching contributions and discretionary profit sharing contributions. As the economy recovers, employees will increase their savings rates with the hopes of making up some of the short fall, and the shift from discretionary spending to savings may act as a drag on the economy.
The good news is that the U.S. remains innovative and the most productive society in the world. Individual companies will find ways to thrive, and whole economic sectors will be showered with benefits as the economy shifts. We continue to believe that a balanced portfolio contains investments in emerging global economies as well as in innovative companies and sectors in the U.S.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Bill Sheehy is owner of Sheehy Associates Inc. which specializes in Retirement Planning for individuals and corporate 401(k) plans. He is a Certified Financial Planner, a Certified Employee Benefits Specialist, a Certified Fund Specialist and a Chartered Retirement Plan Specialist. He can be reached at firstname.lastname@example.org or by calling 609-586-9100.
Sheehy Associates. 3812-B Quakerbridge Road, Suite 208, Hamilton. 609-586-9100. email@example.com
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