Thanks to the uncertainty over the last-minute fiscal-cliff negotiations, the markets finished the month up just slightly, but still managed to close out a pretty good year, despite giving back a little in the last quarter. Technically, that last little selloff took the indices right down to their 200-day moving average only to bounce back quite nicely the first few days of 2013 in response to the announcement of a deal.
Since then, earnings season has begun and the markets have consolidated in anticipation of some weak numbers. Keep in mind that many companies borrowed money in the last quarter to finance special dividends that would be paid before the end of the year to avoid higher rates on dividends. Even though they took advantage of low interest rates, that additional debt still makes those company's balance sheets a little weaker than they were before so some are being downgraded.
Those downgrades can lead to large blocks of stock being sold by program traders and mutual funds and investment companies that have to invest according to certain ratings on stocks. This can create a buying opportunity for investors who really look at the numbers. My opinion, which is always subject to change, is that this is the current situation...especially as it pertains to good dividend paying stocks. I still think we'll see higher-than-average volatility and overreaction to headlines, but a lot of beaten down, high-dividend paying stocks are starting to look attractive, from both a growth and income perspective.
Has congress averted the financial disaster that seemed almost certain just a couple of weeks ago? Is our economy now in a strong recovery and growth mode? Is a bull market about to take off? One might think so, given the headlines and market reaction, but I'm not convinced. The deal to which the house and senate finally agreed was barely a band aid and didn't address much more than tax rates. There were no spending cuts and the automatic sequestration cuts that were built into the last debt-ceiling debacle were just kicked down the road two months.
A resumption of high-profile negotiations will almost certainly knock the wind out of any rally that starts to take off between now and then. That said, buying into those reasonably priced, good dividend payers may be a decent strategy in that we can enjoy the yield while the prices are stagnant and look forward to some growth when and if the economic recovery finally takes hold.
More on this later, but first, the December jobs report. The economy created 155,000 jobs in December, just below the analysts' estimates of 160,000. October's numbers were revised lower by 1,000 and November's upward by 15,000. The unemployment rate held steady at 7.8% because last month's originally reported rate of 7.7% was revised higher to 7.8% due to the Department of Labor's annual revisions. Most of these numbers make sense, except that we've still seen no real impact of the storms that hit the northeast.
The jobs report is usually something the markets look forward to, but in this case, it was almost completely eclipsed by the fiscal-cliff negotiations and the latest report from the Federal Reserve. The Fed admitted it was running out of things to do to try and prop up the economy and reported that the latest round of quantitative easing through bond buying would not continue indefinitely. That put a little downward pressure on the bond prices, but not enough to increase rates significantly.
Barring runaway inflation, which has still not been a problem, the Fed really has no choice but to keep rates at or near zero well into 2014. The other potential threat to low rates would be another credit-rating downgrade. We'll see what congress comes up with in March, but a failure to implement a plan that has some serious deficit and debt-reduction could be all the credit rating agencies need to take the U.S. down another notch or two. At some point, the perception of declining credit worthiness will force rates on our bonds higher to keep buyers interested in taking the continued risk. When that happens, the interest we're paying on our debt will quickly become a major budget issue.
Yes, dear readers, not only have we hit the debt ceiling once again. The Fed will keep the government afloat for a couple more months before they run out of options, which means we get to relive all the fiscal cliff excitement with a new congress starting sometime in March. A few names have changed, but the major players have not, and I don't expect the next round of budget and tax negotiations to be any more-civil, or productive than the last.
If the next bill is as big a disaster as the last, we are in big trouble. Once again, our "transparent" congress hurriedly passed a bill that few, if any actually read. Anyone remember the president saying all legislation would be posted online for everyone to read for three days?
Regardless, the fiscal cliff bill that was just signed was loaded with, get this...more deficit spending...pork, earmarks, tax breaks and subsidies to get enough congressmen and women to support it. While it was sold to us under the auspices of raising taxes on the rich, about 80% of the taxpayers will be seeing higher taxes as a result of what was in and what was left out of the bill. The social-security tax cut that was in place for two years was not extended with the rest of the Bush-era cuts. That will result in a 2% increase for everyone who pays into it, which is pretty much every person who gets a paycheck.
The annual budget deficit has been running at around $1.2 trillion. (The Hill reports the deficit for October alone was $120 billion.) Raising taxes on "the wealthiest 2%," it is estimated, would increase government revenues $829 billion over a decade. Without further deficit reduction, that $829 billion doesn't even cover one year's worth of deficit spending, and we're spreading it out over ten years?!? Congress is using the economic equivalent of a thimble to bail out a sinking ship with a truck-sized hole in it. As long as spending exceeds revenues, the problem is getting worse, and as long as any federal spending is going towards interest on debt, they (we) are wasting money.
I used to laugh at elected officials that talked about "sacrifice" while loading up bills with more and more deficit spending. Now I just think it's disgusting. Until congress has to balance a budget, and suffers the consequences for not doing so, they will never, ever do it. Why would they? Replace them, you say? Fat chance! Nobody will win an election saying we all have to cut back when you know they'll be running against an opponent who is saying, "Don't worry about the economy. I'll take care of you and give you whatever you need. Never mind how we're going to pay for it. Leave that to the smart people in Washington D.C. to figure out."
From an economic common sense standpoint, the path congress continues to follow is irresponsible and unsustainable. It continues to push more and more financial burden onto taxpayers that aren't even born yet. It's almost as if they've taken every piece of advice an individual, family or private company would follow in order to gain or maintain economic security and run, full speed in the opposite direction.
Our government has no budget, it continues to spend more than it makes without any meaningful restraint, it has no savings and no way to make more income other than to take more from taxpayers. Worldwide economic growth is one way out of this where governments and individuals prosper. Continued borrowing and eventual inflation hurts everyone.
Well...Happy New Year! I'm sorry the outlook isn't brighter, but that's how I see it, and we'll be positioning our investments accordingly, with the full understanding that there are two sides to every trade. Pessimism on one side is optimism on the other. Regardless of what congress does or doesn't do, we'll be doing all we can to make 2013 a more-prosperous year than the last for our clients. You know where to find us. Call or e-mail any time and we'll do this again in about a month.
