Eight times per year the Federal Reserve Board publishes the "Beige Book" report. It is a gathering of anecdotal feedback on current economic conditions by each of the Federal Reserve Banks. Although it is not official commentary from the "Fed" it does provide a pulse on how the economy in general is fairing and what areas are lagging and which are leading. Since we have been hearing from the media that the recession has ended we thought it would be helpful to provide the summary of the Beige Books findings published October 8th and then provide our take on the data.
"Manufacturing activity continued to expand, with production and new orders rising across most Districts. Demand for nonfinancial services was reported to be stable to modestly increasing overall. Consumer spending was steady to up slightly, but consumers remained price-sensitive, and purchases were mostly limited to necessities and nondiscretionary items. New vehicle sales held steady or rose during the reporting period; sales of used automobiles were strong as well. Activity in the travel and tourism sector picked up.
Housing markets remained weak with most Districts reporting sales below year-ago levels. Reports on prices suggested stability, however. Conditions in the commercial real estate sector were subdued, and construction was expected to remain weak. Lending activity was stable in most Districts. Agricultural conditions were generally favorable, and above-average yields were expected in most reporting Districts. Activity in the energy sector continued to expand.
Input costs, most notably for agricultural commodities and industrial metals, rose further. Shipping rates increased, and retailers in some Districts noted rising wholesale prices. However, prices of final goods and services were mostly stable as higher input costs were not passed on to consumers. Wage pressures were minimal."
Our interpretation of this summary is the economy is beginning to see cautious optimism. The backbone to the U.S. economy is consumption. If we aren't consuming the economy doesn't grow. With housing values continuing to suffer and the reluctance of our financial institutions to begin lending at normalized levels, the American consumer is lacking the piggy banks they relied on for many years to buy their goodies. As history has shown us many times, the pendulum usually over swings and it takes time for it to come back to center. Sometimes this happens quickly but unfortunately we don't believe this to be the case this time around as nearly every safety net that businesses and consumers relied on has been pulled away. Its not that we are expecting post "credit crunch" numbers, but a level where consumers and businesses "feel" comfortable spending and investing; clearly we are not there yet.
On a brighter note, the markets appear, in the short term, to be in the second leg of a "cyclical" bull market that could very well last into early 2011. Caution is still par for the course as the backdrop remains the "Secular" bear market environment that began in 2000. Since no one can predict the future with certainty, we design our strategies specifically to combat the uncertainty that the markets will always possess. It's simple; we step aside when market risk is high and invest for return when risk is low. "Buy and hold" and index investing does not work in this environment! A -21% total return on the S&P 500 over the last 10 years should be evidence enough. Give us a call to learn how Volt can help you position your portfolio for success during the Secular Bear environment we are currently navigating.
