The Year That Wasn’t
This past year may be marked not for what happened, but for what did not happen. The United States did not go over the fiscal cliff, nor did it default on its debt. The Federal Reserve did not stop buying bonds and mortgages, pushing the market to new highs, and inflation did not rise as many had predicted.
The lack of inflation has not pleased gold investors, who had a poor year — all very counter intuitive given the amount of money printing throughout the developed economies.
For us, the most troubling recent news was the weak agreement reached with Iran on its nuclear capabilities. It is clear to us that Iran is using these negotiations as a stalling tactic. Although we are pleased that hostilities did not escalate, we are very concerned about the ultimate showdown that we view as inevitable.
The worry throughout big corporate America is how to grow profits despite lackluster sales growth. Profit and sales growth are easier to come by in smaller companies that innovate. Technology businesses can experience growth by bringing new experiences to market — selling soap is a different story!
The latest retail report showed a 2.3% gain in sales on Thanksgiving and Black Friday. These are the weakest holiday results since 2009. Retailers went to great lengths to give big bargains as they were concerned about moving inventory off the shelves. Online retailing continues to grow, and bargains online were at least as good as in the brick and mortar stores of major retailers. Online retail sales rose 20% from last year on Thanksgiving. This is a clear trend.
What did happen this year is that the Earth showed further signs of climate change, a trend we expect to continue. The Middle East turmoil continued with Syria and Egypt in the headlines. The lowlights of the year were tragedies in Boston, Bangladesh and Oklahoma, among other places, — and the sad passing of Margaret Thatcher at 87.
We continue to believe in American ingenuity and courage. Despite many government initiatives, it has still been a long five years since the crisis of 2008 when the financial system almost came crashing down. Yes, growth has been anemic, but healing has occurred in many sectors, including the all-important housing sector. The healing has brought asset values back, but the hole was so big that the Federal Reserve, in our view, will be assisting the economy for at least the next two years, if not longer.
The concern that interest rates would move higher proved to be correct. On January 1, 2013 the ten year treasury was at 1.91%. As of December 3rd, it now stands at 2.78%. The direction of interest rates, particularly the ten year treasury because of its impact on mortgages, is a key question moving forward. Ten years ago, this rate was at 4.05% – so we are of the view that one should get as long term a mortgage as possible now.
Big companies have plenty of cash on their balance sheets to buy back stock, make acquisitions and make capital investments, if they so choose. These expected actions, coupled with additional cash on the sidelines and a low interest rate environment make it difficult to see a big stock market correction anytime soon. Those facts notwithstanding, no one ever went broke taking a profit… so we will be on the lookout to cash-in some of our chips when practical.
Obamacare and over regulation are the biggest threats we see to continued slow growth in our economy. If we could find solutions to improve both — ah, what a wonderful world this would be!
As we wind up 2013, we want to thank our clients for their continued trust and confidence.
Helen Keller said, “The best and most beautiful things in the world cannot be seen or even touched. They must be felt with the heart.”
From our hearts to yours, may you enjoy health, joy and peace in 2014.
