In the 1980’s U.S. government changed how it calculated “core” inflation by excluding price increases in food and gasoline. Unfortunately, these items are a major part of consumers’ budgets. As such, I and others believe that inflation rate in the U.S. is higher than actually reported. Also, other central banks around the world are raising interest rates to address their specific inflation concerns. Thus, at some point in time the U.S. via the Federal Reserve will need to do the same.

Currently, there is a battle on Capitol Hill regarding raising the U.S.’s debt ceiling (i.e., how much the U.S. government can borrow). Some analysts are concerned that if policymakers continue to just make very short-term extensions or worst of all not allow an extension, then the government would be forced to shut-down. This would result in the U.S. government defaulting on its debt, which many worry would cause tremendous psychology and economic damage to world stock markets and economies.

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Before I start, I want to be clear; this is an economic and not a political commentary.  I am sharing my thoughts and concerns about what is occurring currently and the potential impact on all of us.

I consistently read articles and view videos on a myriad of financial topics.  Much of them relate to institutional and fund managers and the investment strategies they are implementing and their reasoning behind them. 

Even though we are in the midst of an economic recovery, there is a tremendous amount of uncertainty and the looming “government shutdown” only adds to it.  Businesses large and small, as well as consumers, want some certainty when planning for the future.  For example, most likely you’re not going to go out and buy a new car if you know the firm you work for is getting ready to lay off 25% of the workforce.  On the other hand, if you are in a secure position, live within your means and have set money aside, then making such a purchase may be a very prudent and well thought out strategy. 

Unfortunately, there is an 800 lb. gorilla in the room that has been growing and becoming more menacing over the decades, and it is the U.S. government’s deficits and outstanding debt.  It is true that we are a government of the people and for the people and as such, we (all of us) are eventually responsible for this debt one way or another.  Currently, we are seeing the implications of not addressing this issue in Japan, Portugal, Greece, etc.  Left unaddressed, an ever-growing deficit can lead to a country printing more and more of its money to try to overcome the problem in the short-term.  Basic economics state that anytime you create more of something, then it declines in value. 

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Current economic news

• The Labor Department said the unemployment rate fell to 8.8 percent, the lowest since March 2009, as companies added workers at the fastest two-month pace since before the recession began. Approximately 216,000 new jobs were added to the economy last month, offsetting layoffs in local governments.    
• The Dow Jones industrial average closed its best start to the year.  Also, measured against other first quarters, it had its largest point gain since 1998 and the second best on record.  The stock market has been resilient in the face of uncertainty.
• The Institute of Supply Management reported a slight slowing in manufacturing growth during March.  In addition, the Commerce Department delivered more bad, but also expected news on the construction industry.  The government said construction spending fell in February to its lowest level since 1999.

Overall the momentum for the economy and stock market has been on the upside. 

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It appears the consensus opinion is that due to the recent tragedies; Japan’s growth rate will likely fall in the near term, but reconstruction activities should stimulate growth over time.  Here in the U.S. this opinion seems to be taking hold and evidence of this can be seen in recent stock market trends.  As of the close of the market yesterday, the three major U.S. stock indices (Dow Jones Industrials, S&P 500 and NASDAQ) are all above where they stood just prior to the tragedies that took place in Japan on March 11^th of this year.

Along these lines, I saw a presentation on CNBC that illustrated the stock market’s reaction to past nuclear tragedies dating back over 50 years.  Surprising, the average decline of the Dow Jones Industrials average one month after such events was down approximately 1.70%.  As horrible as some of the events appear, the realty is Wall Street and investors very quickly begin to start looking past what has occurred and ahead. 

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St. Patrick’s Day brought some Irish luck to the stock market and a sense of rationality.  The unrest in the Middle East actually took a back seat to the tragedies in Japan.  Please note, I am not downplaying the horrible events that have occurred in Japan.  My point is that it is not the end of world!  During this tragedy, this past Wednesday to be exact, I specifically saw the Dow Jones Industrials decline approximately 1% due to some comments regarding Japan’s nuclear reactor crisis from a European diplomat.  However, within 15 minutes or so, it was reported that these comments were not only old news, but that the individual who made them was not in the position of authority, and he didn’t have adequate knowledge of the situation to speak intelligently about it.  Upon hearing this revised news the market retraced all its losses.  Read more

Sometimes it can be overwhelming trying to find help when you need it most.  Rather than shooting in the dark or finding someone out of the yellow pages and hoping for the best; why not use us as a resource?  In our line of business, we are able to work with service providers and professionals of all walks of life.  If you need a second opinion or another resource, we can try to find you the help you need.  We have dealt with many attorneys, accountants, estate planners, contractors, mechanics and others that we trust and can help point you in the right direction.  Read more

·         Consumer confidence in February was at its highest level in over three years.  This explains the International Retail Council of Shopping Centers positive retail sales announcement for last month, and why earlier this week automakers reported double-digit sales gains for February, extending a recovery that started late last year.

·         The Labor Department said first-time claims for unemployment benefits fell to 368,000. That’s the lowest level since May 2008.  The signs of job growth followed a report Wednesday from payroll processor ADP saying that private employers added far more jobs than analysts had expected last month.

·         Indexes of manufacturing output hit their highest levels in seven years in the U.S. and more than ten years in Europe, marking an accelerating expansion that could add to inflationary pressures.  Meanwhile, Asian factory output kept growing but at a less rapid pace.  China’s manufacturing sector posted its slowest expansion in seven months, easing worries about an overheating factory sector there.

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For the last six months, the stock market seemed to advance without any interruptions and shrugged off any negative news.  That is until this week.  Unrest in the Middle East, protestors here at home and senators fleeing their states, higher oil, gasoline and food prices, along with a decline in housing prices, seem to be the headlines of the day. 

Ironically, the headlines and TV anchors have done a 180.  Up until this week, the sky was the limit and the U.S. economy was making nice strides and markets around the world were advancing as well.  Now, the mood is decidedly negative and apocalyptic.  Read more

Now that the snow is thawing, the sun shining and the birds chirping; we all know that it’s time for our favorite season.  No, not spring, but tax season.   All of us at IIA realize that it may be more joyous for some than others, but that’s why we’re here to help.  If you have any questions about your investments and how they may impact your taxes or if you would like us to discuss your investments with your tax professional, we would be more than happy to be of assistance.  Additionally, if you need help finding a qualified tax professional, we’d be happy to refer you.

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Last week I spent several days at the TD Ameritrade National conference for financial advisors.  All types of industry experts were on hand and CNBC televised from the conference.  That being said, it was like drinking from a fire hose.  Tons of great and applicable information, and I will be sharing some of the most pertinent with you in future commentaries.  That being said, I am going to take a break from the commentary this week and try and get some flowers ordered before it’s too late!  Read more