Watch what consumers do rather than what they say

Consumer confidence may well be in the dumps, but it is more important to watch consumer behavior when judging the economy. In June, consumers added $15.5 billion to their credit lines (revolving plus non-revolving). According to the Federal Reserve Bank of Atlanta, that was the largest monthly increase since August 2007 (see chart). Non-revolving credit (e.g., auto loans) increased by $10.3 billion while revolving credit (e.g., credit card balances) increased by $5.2 billion. This data is, of course, before the contentious debt ceiling debate and all of the alarmist headlines about defaulting so we may still see some pull back in July’s data, but the trend is up for the economy based on this data.

Additionally, we watch the Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) to get a read on the real-time performance of the U.S. economy.  Figures above zero indicate economic measures are coming in above average while figures below zero, you guessed it, indicate economic results are coming in below average as reported.   If we look at the ADS Index (see chart below), one can see the slowdown from Q4 2010.  Growth in the economy appears to have bottomed out about midway through Q2 of 2011 and picked up since that time.

While the economy seems to be frustratingly stuck in first gear (and at more risk from some economic shock), we don’t anticipate a new recession.





Testing Your Risk Tolerance

If any traders’ proverb has been further from the truth this summer it is “Sell in May and go away.” It used to be that summer was a time where the stock, bond, and commodity markets didn’t do much because everyone was on vacation (either literally or figuratively). As we all know that sure hasn’t been the case this summer in large part due to the Debt Ceiling deadline of August 2nd. Combine that with the S&P 500 downgrade of our U.S. Government debt, add the European economic woes, and some lackluster U.S. economic reports and it’s no wonder no one had time to “go away”.

Individual investors are having their risk tolerance tested to the nth degree this summer. But, we would argue that that isn’t all bad. Sure, investors can pick a chart on a risk tolerance questionnaire that they feel they can withstand on the downside and enjoy on the upside. However, it is a whole lot different when the upside and downside is actually happening. It is more of a barometer of an investor’s true risk tolerance in a down market than in an up market. As another saying goes, “The pain of a loss is felt more acutely than the pleasure of a gain.”

The concept of asset allocation is not a new one but sure can get lost when markets seem to do nothing but go up (either stock or bond). At the beginning of the year investors were feeling more risk tolerant as the stock market took off. It is times like now when having the appropriate asset allocation to meet investment needs and objectives proves to be the best strategy for the long term. Couple asset allocation with having an investment advisor take the emotional element out and the individual investor should be sleeping better at night. No one can predict market gyrations with a 100% accuracy but one can try and build portfolios to withstand them.

We are always available to discuss your asset allocation.

Some Perspective

The downgrade of the US by Standard & Poors after the market’s close on Friday had been widely expected.  There was a flurry of finger-pointing and hastily-called meetings over the weekend, but the decrease in the stock indices we are seeing today reflects a healthy return to the fundamentals of investing more than they reflect any damage attributable to the ratings of the US.  The fact remains that the global equity markets are fearful of sustained weakness in the US economy as well as in Europe.  The possibility of Greek/Italian/Spanish debt default far outweighs any AAA/AA rating of the US.  The fact is, the investing community values the US Treasury market as much for its depth and liquidity as it does for any specific rating, so we are not surprised to see a flight to US debt at this time.  So, what are the prospects for growth in the US for the remainder of this year?

With the recent revision to GDP showing a deeper recession, a slower recovery, and more inflation, markets were nervous ahead of Friday’s employment report.  However, while not a grand slam report, it wasn’t all that bad.  The private sector created about 145,000 jobs in July (picking up some of the slack in government layoffs) and the last two months (of disappointing data) were revised higher.  The first chart below shows the long-run history of private sector employment.  This recession’s recovery appears to be playing out like the last two—maddeningly slow recovery in jobs.

Drilling down to look at the monthly change in private sector employment, the spring weakness appears to have not been a trend.  If you recall, we saw this same concern—and market gyrations—last summer.

If we look at money supply growth in the next chart, it appears we are finally getting some traction (up over 6% year over year) from all of the liquidity which the Federal Reserve has foisted on the banking system.  All in all, while Europe’s problems shouldn’t be overlooked and China’s attempts to cool their economy are a concern, we think  the second half could show better growth than the first.