Rarin' to go....nowhere
The stock market's valuation
expansion has left a bittersweet taste in the mouths of some who believe that
this historic sequence of "new highs" is simply smoke and mirrors and
accelerated expectations. Indeed, while the wealth effect is
improving the lot of many, it is also exacerbating the gap between
"reality" and "perceived-reality".
It doesn't feel like a bull
market to everybody.
To be fair, the economy is
much improved from its cataclysmic bottom in 2009, but even the gains we have
made are narrow and gradual. Until we see an uptick in people's mood about
the economy, no amount of data shifts can remake our perceptions that the pace
of growth is arduously slow.
Confirming that fact is the outgoing Federal Reserve Chairman himself,
who noted that the economy has "much
farther to traverse before conditions can be judged as normal."
So, while the policy-makers
jiggle on the throttle a little bit, consumers are holding on tightly to their
wallets pending any new
(negative) occurrences.
Spinning wheels
Traditional capitalists argue
that jobs are created from the ground up, neighborhood by neighborhood. In
fact, small jobs' growth is happening at a rate far slower than in the economy
at-large. That's mostly because
small businesses are more susceptible to permutations in borrowing costs, wage
expectations, and local tax initiatives.
The ongoing wave of newly unemployed or underemployed affects local
communities and municipalities far heavier than its impact upon larger
corporations, many of which have been preparing for an economic downshift by
hoarding cash reserves and laying-off those very workers who populate the local
unemployment lines.
As a result, any
discouragement about economic stagnation is felt mostly by the "average
Joe", while big businesses try to bide their time and ride out the down-cycles.
Make no mistake, fiscal belt
tightening is felt by everyone, but to a much larger degree by those who can
least afford to absorb it.
Gross versus net
This year, as investors
perceive that their portfolios are larger and their home values are increasing,
they are choosing to "hold on" to their recovery gains rather than to
spend that money flagrantly. And, the
government has been no help to them.
Locked in a political stalemate,
our legislators have imposed the biggest "phantom tax" upon its
citizenry in decades by shutting down the government for political spite and by
allowing sequestration to rob the programs (and pocketbooks) of badly needed
funds to our Federal safety net.
To make matters worse, the Fed is "taking its foot off the
spending pedal" while the government rejoices over interim compromise
spending cuts. The net effect is to shift the social burden to cities and states which,
as mentioned, have a shrinking tax base from which to address these local
issues. You can see why some feel like
the recovery never really happened for them, and the recession is still their
reality.
The bottom line both for the
economy and the financial markets is that confidence and demand move the
needle. Protestations to the contrary,
you can lead a horse to water but you can't make him spend. While I am
forecasting higher market valuations for year-end 2014, and a stronger economic
landscape globally, it would be improbable to predict percentage gains equal to
last year.
All equity, fixed income, and
cash allocation decisions going forward must be scrutinized in the context of
each client's unique risk/reward tolerances.
There is no "one size fits all" response to a market which
many experts believe is a crude amalgamation of exuberantly excessive asset valuation
expansion, political risk, and fiscal confusion.
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