The huge Federal budget deficit that was created to help the U.S. economy crawl out of the Great Recession is shrinking faster than many people predicted, in part because of reduced Federal spending, but mostly due to significantly higher tax bills. The U.S. consumer is paying more in taxes but has also been a more prudent spender compared to the freewheeling habits of acquisition and consumption we saw only a decade ago. So the ongoing recovery will likely remain slow but steady.
With some of the world in war-torn turmoil much of the rest is experiencing economic stagnation, so it is not surprising that the U.S. is attracting lots of foreign investment money, much of which is buying companies listed on the S&P 500 index. In spite of a strong dollar (which makes the U.S. more expensive), foreigners are also buying U.S. Treasury Bonds, Real Estate, Shopping Centers or simply parking their cash here because it is the only place in the world still considered a safe haven. The U.S. economy is adjusting to the current low-interest rate and slow-growth global investing environment and we at SH&J recognize how the marketplace is changing. We continue to seek global opportunities, knowing that we can and should buy investments abroad while they are so cheap, but recognizing that we need time and patience for some of the economies to recover and ultimately reward us. As usual, we continue to balance our foreign opportunities with significant investments in all of the U.S. markets. We will continue this global approach into 2015.
The U.S. unemployment number in October was 5.8% – the best result since July 2008. We created 200,000 new jobs for the 9th consecutive month in the U.S. Meanwhile, Europe, with the exception of Germany, is in recession with painfully high unemployment rates, especially for those under age 35. It has become common throughout Europe that the ambitious and college educated must seek employment opportunities elsewhere, and send money back to the old country to support those less fortunate. The European Central Bank has promised to provide some belated stimulus that may ultimately stimulate some activity, but this shift from austerity into stimulus is much more effective when implemented at the early stages of a recovery and not, as in the current situation, when teetering on recession.
Japan is trying hard to recover from over 15 years of stagnant economic growth. In an effort to get consumers spending again, the Bank of Japan is injecting huge quantities of money into their domestic and the global financial system by buying Government Bonds, Stocks, Real Estate, almost anything. It is making our Federal Reserve Quantitative Easing program look timid! The outcome is impossible to predict but it’s hard to imagine Japan will be able to print enough money, fast enough to get their economy moving when consumers are standing in the wings.
China is seeing its growth slow from an optimistic 7.5% to a more likely 7% or even less. The Party spending on infrastructure is shifting away to other priorities, and consumer spending is in need of stimulation. China is one of the few nations where consumer spending as part of their total economy has been actually shrinking for almost a decade, so the Bank of China is attempting to encourage more (non-housing) borrowing. The outcome of these programs is also uncertain.
We make selective changes in portfolios each January. We ask that each of you check your needs for cash for 2015 (New car? Trips? Tax payments? Help others?) We will always keep sufficient cash in your portfolio to provide a small cushion for unexpected items, but if you need to replenish your personal reserves, contact us before we complete our rebalancing and reinvestments for you.