Inside Signature Update
- The Market – Starting the Year Off on the Right Foot
- The Economy – Oil’s Influence and Domestic Agriculture
- The Takeaway – A Time for Full Investment
THE MARKET – Starting the Year Off on the Right Foot
Starting the Year Off on the Right Foot
The US equities markets opened the New Year with the right start Monday as the DOW closed up by over 155 points representing gains across the boards. Trading in Tuesday’s market, though choppy, largely held onto the gains as investors looked past weakness in the housing markets and shifted focus to intraday strength in the dollar and good news from higher-than-expected December retail spending estimates, a sharp rise in sales at Ford, and Google’s unveiling of a new smart phone.
Many believe the direction and volume of trading the market sets at the first of the year establishes a trend that the remainder of the year will follow. While it’s a nice thought, there are simply too many influencing factors to take the notion seriously.
Just as 2009 was a year of calamity and recovery (partial) for the markets, 2010 is likely to be a year of sustained, though temperate, improvement. Some of the more popular market forecasters have already weighed in and their prognostications are all over the board. There are nearly as many calls for substantial gain as meaningful decline, and some suggest the markets will remain flat. In truth, no one knows. But here are a few things to be aware of:
Unemployment isn’t likely to dip below 8% in 2010; if it does, the markets will reward the movement handsomely. As long as we don’t rise above current levels we should be out of the woods relative to meaningful market declines below current levels.
The Federal Reserve, already under pressure to raise key interest rates to stop the dollar’s decline is showing very few signs of meaningful change. Increases in rates will strengthen the dollar and so far, stronger dollar momentum has offered declines in the equities markets.
Rising energy costs could threaten corporate earnings by increasing manufacturing and transportation costs and putting pressure on household budgets. Though this could be offset by employment gains, no one other than OPEC likes to see oil prices climb much beyond current levels.
The current presidential administration and the US Congress aren’t likely to be any more productive in 2010 than they were in 2009 and there won’t be a recession to blame for the lack of results. There are too many policy makers from both sides of the aisle who’ve taken positions they’re unwilling to move off of. It’s hard to see a scenario where any joint action of the House and Senate could offer substantive impact on the markets until after the 2010 elections.
Signs are already shaping up for technology, healthcare, commodities, and agriculture to be winners for 2010. Emerging markets and financials have already rebounded with such strength that they’re likely to perform well as a global recovery continues, but ought not to offer the excitement they provided in 2009 – thank goodness!
Real estate inventories aren’t likely to improve dramatically as lenders have large portfolios they’ve yet to put on the market. They’re smart, they’ve learned to keep these assets out of the market in an effort to maintain current price levels and avoid write downs.
Positive game changers could include a surprisingly accommodating congress (not at all likely), a break in the correlation of dollar and equities market moves (it could happen), and deft activity by the Fed to support the dollar while leaving rates low (possible, but tricky).
Negative breaks could come at the hands of Iran or Israel as tensions mount (anyone’s guess). Likewise, potential weakness in China could upset the current flow of export goods from the US to Asian markets (not all that likely).
THE ECONOMY – Oil’s Influence and Domestic Agriculture
Oil Trading over $80 per Barrel
With the price of oil having once again breached the $80 per barrel mark, consumers and businesses are preparing for higher energy prices that are likely to remain for an extended period of time. The good news is that the economic recovery has clearly improved corporate production and earnings, and has begun to take the edge off of unemployment. The bad news is that it will still be months before the labor market feels any meaningful benefit and higher manufacturing output and consumer confidence levels quickly gives rise to higher energy demand; we all know what happens when demand rises – prices rise in direct association.
Though we’re not suggesting we’re likely to see triple digit oil prices soon, it’s a possibility worth noting. Any increase has an immediate impact on household budgets and corporate earnings. With the economy still relatively brittle, increasing prices have an almost immediate impact on demand – the offsetting pressure should be enough to keep prices from rising to uncomfortable levels. Additionally, the speculator and hedge fund activity that pushed oil towards $150 a barrel in 2008 may not be an active threat in the current market.
The airlines, which have enjoyed relative calm in the oil markets for over a year, are gearing up for rising costs by structuring fare increases and maintaining various surcharges once thought unsustainable; they now appear to be a long-term part of the cost of air travel. Trucking and rail transports, many of which never abandoned fuel surcharges, continue to adjust these pricing elements in an attempt to maintain viable business models while still remaining competitive. It’s a delicate balance at a tricky time in the economy.
Domestic Agriculture on the Rise
Also worth noting is a trend we’re likely to see emerge in the foods markets. Though much of the food product we consume is produced domestically, there are still major imports from Central and South America, Europe, China and other parts of Asia. Much of the import activity is based on business models dependant on lower costs of production and transportation of bananas, coffee, chocolate, fish, shellfish, apple juice, cashew nuts, spices, and other imported foods. Those models have now been under pressure for over a year as a decreasing dollar has increased the real price of all import goods and due to the high cost of transporting foods around the world.
In decades past, rising real estate prices, low exchange rates and cheap oil allowed the US to increasingly abandon food production. As exchange rates and transportation costs began to rise in recent years some producers began to gear up for future domestic production, but faced enormous pressure due to still rising real estate values. Today the trend is in full reversal and hundreds of thousands of acres previously thought prime for development are being readied for production.
Already focusing on sustainable crop development, domestic producers and suppliers see opportunities for more local and regional production and consumption patterns. For the first time in generations the number of small farms has shown marked increase. In February 2009 the US Census Bureau reported an increase from 588,000 small farms in the US to over 700,000. The increase, once thought to accommodate increased demand for organic produce, now appears to have more momentum.
The 2010 Census Report shows a slowing in the decrease of US farmlands from 987 million acres in 1990, to 945 million in 2000 to 931 million in 2007. USDA estimates reflect an increase to 933 million for 2009 – the first increase in agricultural land use in decades!
Coupled with the demand for organic goods and sustainable production, the affordability of domestic agricultural output due to exchange rate changes and transportation cost increases may not only offer hope to US farmers, but also represents a potentially meaningful contribution to much needed US GDP gains.
THE TAKEAWAY – A Time for Full Investment
This should be a year for full investment – if you’re on the sidelines you’ve missed out on meaningful gains, but you may have also avoided an unacceptable level of risk.
Those able to take advantage of improved ROTH IRA conversion benefits should consider the merits of tax-free income in the future. The likelihood of future tax rate increases makes this even more attractive.
Healthcare legislation will pass this year and reward very few of us. Energy legislation has little chance of seeing a full vote in either house of congress.
The mid-term elections this fall could offer a shift in the balance of legislative power. In general, the country is more upset right now with the left than the right, but it’s early and that pendulum can swing back and forth with ease before Election Day.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
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