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Is There Growing Optimism in US Economy?

For the last few weeks, we’ve all been distracted with important issues. To name a few, completing tax returns, listening to the debate on guns, and following the news on the rising tensions in North Korea.

If you think back, you may have missed a headline about the Dow Jones Industrial Average breaking its all-time high. That happened on March 5th, a little less than 2 months ago. It’s a worthy milestone to reach. But what does that mean for your investments or the future?

Everyone has an opinion. When asked “What do you see happening next in the economy”, a well respected economist responded “If I had a crystal ball and knew the answer to that question, I wouldn’t be here. I’d be sitting on the beach.” Some look at this event and say that we’ve reached a high water mark and that we should expect to see the market decline. Others look at this and see it as an indication that the bull market is continuing along. Is the glass half empty or half full? Are you optimistic or pessimistic about the future?

We continue to be optimistic in our approach. We see the looming clouds as bumps and obstacles, but not significant enough to derail the recovery. We see issue after issue being wrestled with and slowly pushed down the road, resulting in near-term clarity, but few long-term solutions

If you’re on the fence, not sure what to make of this recovery, the following link offers a great case for being optimistic about the future.

The Case for Optimism

 

Recap of a Letter Written Before the Election

The following comment was included in the newsletter we sent to our clients at the end of September. It was written during a period where many were unsure how the election would affect their portfolio.

“It’s actually been a pretty good year for most investors. So here we are about 45 days away from the election, and it appears to me, with the recent surge (both US and global), that the markets are picking up steam.

What explains this improvement, considering the dark clouds apparently forming? Could it be possible that the markets would actually strengthen after the election, regardless of who wins it, simply because one huge uncertainty will have been removed? We’re already at the point where, here in the US, corporate earnings, cash flows, cash positions, and dividend yields are all near record levels.

How did this happen when the investor class is full of dread (a looming fiscal cliff or taxmageddon are being discussed by the talking heads all the time)? Can the gulf of relative value between the US bond market and the US stock market, which has been growing almost unabated for 30 years, grow still wider? Or, could it be that John Templeton is right again, and that it is exactly in times like these that bull markets are born?

I don’t discount the volatility that comes with the cyclic nature of the economy, especially one impacted by globalization. The tough months / quarters / years happen for all sorts of reasons and will probably continue. But there are great companies out there that will continue to sell mass quantities of cola, diapers, and the hottest cell phone, and sell those around the world, even if Greece leaves the Euro, or Spain defaults, or if the wrong person wins the presidential election.”

A Golden Age

It’s easy to forget and lose perspective about what is happening in this world. From uncertainty in our economy and in Europe, the looming fiscal cliff, and most recently the tragedy in Newtown, we may be feeling lost and unsure about the future. Just turn on any news program. The pundits, news anchors, talking heads, supposed experts, and politicians are talking about the problems we face.

But let’s not forget some amazing accomplishments that have occurred in recent years:

· People throughout the world are now living longer than ever before, here.

· Extreme poverty has been dropping year over year, thanks in a large part to the improving economies in Asia, here. . (For a fascinating comparison of population size and prosperity over the past 200 years, visit here. )

· The cell phone is playing a huge part in reducing poverty. “A 2010 U.N. study, for example, found that cell phones are one of the most effective advancements in history to lift people out of poverty.” Time Magazine.

· Global food production continues to increase, here.

· GDP per capita has been rising throughout the world, here.

· Scientific and technical journal articles have been increasing each year, leading to more and more health and science breakthroughs, here.

· On a global scale, people are building and inventing more new technologies than ever before. Patent applications have been rising each year, here.

· Deaths related to battles, conflict and wars are showing a downtrend, meaning there are fewer death than ever before due to conflicts, here.

· For more trends that point to an improved and improving world visit here.

“Never has there been less hunger, less disease or more prosperity. The West remains in the economic doldrums, but most developing countries are charging ahead, and people are being lifted out of poverty at the fastest rate ever recorded. The death toll inflicted by war and natural disasters is also mercifully low. We are living in a golden age.” (link to full articlelink to full article)

The above article is a fresh perspective and provides a positive view of a world that many are unsure about. The fiscal cliff just doesn’t seem as important now as it did a few moments ago.

We hope that you have a wonderful holiday and when you have a conversation with family or friends that delve into what this world is becoming, think back to this newsletter and all the good things that are happening.

Maybe we are living in a golden age and we can’t see it.

 

Are You at Risk of the Tail?

If you’re an investor worried about another major decline in the markets like the one experienced in 2008-2009, then you’re worried about something called “tail risk”. Just like the probability illustrated on a bell curve, the majority of gains and losses are usually within a certain range. But there is a chance that your portfolio could decline so much that it hits the far tail of the curve. PIMCO has an excellent illustration of tail risk.

Bell curve showing tail risk

You’re not alone in thinking that another major decline is on the way. A recent survey reported by Financial Times shows that many of the worlds biggest investors foresee another major market drop (Read more: Investors fear imminent tail-risk event).

As discussed in the article, some of the strategies that could limit your losses if such an event were to happen again include: managed volatility equity strategies, direct hedging and other alternative asset allocations (such as property or commodities), or going all to cash since inflation would likely be low. And for what it’s worth all of these strategies are included in The Active Asset Allocation Portfolio.

Then again, have you considered the possibility that we are entering a significant bull market and that we at the other end of the tail?