Washington’s Circus, North Dakota’s Success & 2013 Positioning

December
31

Written by: Jon McGraw

“This too shall pass.” –Ancient proverb

Like getting emotionally involved with your favorite sports team, it’s easy to get caught up in the drama surrounding the fiscal cliff. Combining politics, money, power, gamesmanship, and national impact makes for a compelling story line. But you know what? “This too shall pass.”

As Reuters reported, “One way or another, Washington will come to an agreement to offset some effects of the cliff. The result will not be entirely satisfying, but it will be enough to satisfy investors.” Unfortunately, we have to go through a totally avoidable wailing and gnashing of teeth before we get the Democrats and Republicans to do what ordinary Americans do when faced with opposing issues—compromise.

Up until last week, the stock market seemed undeterred by the circus in Washington. However, as it became clear that a deal would come down to the wire, investors got nervous and stocks experienced five days of declining prices.

Unfortunately, this partisan bickering could create an unintended consequence.

Back in 2011, wrangling over the debt ceiling triggered the first-ever U.S. credit downgrade. Even though the debt ceiling was raised and the U.S. did not default, credit ratings agency Standard & Poor’s nonetheless lowered the U.S. credit rating stating, “the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” If the continued discord in Washington leads to another downgrade, it would not be good for the financial markets, according to Jonathan Golub, chief U.S. equity strategist at UBS Equity Research.

Outside of the fiscal cliff, one thing we know for sure will pass this week is the end of one year and the beginning of a new one. And to that we say…may the New Year bring you health, happiness, and family closeness.  


Data as of 12/28/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

-1.9%

11.5%

12.2%

7.5%

-1.1%

4.8%

DJ Global ex US (Foreign Stocks)

0.3

13.6

15.3

1.6

-5.3

7.6

10-year Treasury Note (Yield Only)

1.7

N/A

1.9

3.8

4.1

3.8

Gold (per ounce)

0.4

5.3

5.5

14.4

14.7

16.9

DJ-UBS Commodity Index

-0.1

-1.1

-1.1

-0.2

-5.5

2.3

DJ Equity All REIT TR Index

-0.7

18.2

18.8

16.3

5.6

11.7

 

NORTH DAKOTA IS A SHINING EXAMPLE of why things are not always what they seem.

Back in 2009, PIMCO coined the term, “New Normal” to reflect their view that the U.S. had entered a multi-year period of balance sheet de-levering and restructuring that would stunt economic growth and keep stock market returns low. So far, they’re half right. Economic growth has been moderate as predicted but the stock market has performed well since the beginning of 2009 as it bounced off the bear market lows.

Implicit in PIMCO’s view is the idea that economic growth comes from three factors.

  1. Growth in the workforce (demographics is key)
  2. Growth in productivity (helped by improvements in technology)
  3. Growth in physical capital (e.g., plant, equipment, machinery)

Source: University of Colorado

Here’s where it gets tricky—trying to predict changes in those three variables is not easy.

For example, let’s turn the clock back to July 1, 2011. On that day, if we asked you to guess which state would have the highest percentage growth in population over the next 12 months, what would you have answered? Would North Dakota have come to mind? Probably not, yet, the Census Bureau recently reported The Peace Garden State topped the list in the past year.

This achievement is even more remarkable considering North Dakota was only the 37th fastest grower between 2000 and 2010. In other words, it essentially came out of nowhere to become a fast grower all thanks to new technology which enabled the rapid development of an oil- and gas-rich shale formation.

Today, fiscal cliff issues, massive deficits, unsustainable government spending, Eurozone problems, and the Middle East powder keg are just a few of the many reasons to be negative on the markets and the economy. Yet, we need to remember North Dakota.

Nobody knows where the next “North Dakota” will come from, but it will likely come. So, while things may be tense in the markets and the economy, chances are our American ingenuity will rise to the occasion and eventually restore us to a position of economic strength.

As that unfolds in 2013 and beyond, we’ll keep doing what we do which is manage your investments according to your goals and doing our best to achieve solid risk-adjusted returns. If you are interested in learning more about our specific positioning of investment assets as we move into a new year we have posted a year end summary on the Buttonwood Blog which you can read by simply clicking HERE.

Weekly Fun – Think About It…

“Year’s end is neither an end nor a beginning but a going on, with all the wisdom that experience can instill in us. Cheers to a new year and another chance for us to get it right.”  — Oprah Winfrey, talk show host, media mogul.