Is it Time to Climb?
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Investors have been roughed up over the past year, with multiple crises grabbing the headlines. And with the S&P 500 within roughly 100 points of where it was a decade ago, many investors have become disillusioned with stocks. We understand the frustration but remain convinced that the best investment for outpacing inflation over the longer term is equities. After a two-decade span when bonds outperformed stocks historically (as has been the case since the early 1990s), the following decade has always shown a reversal, with stocks outperforming.
Encouraging signs for equity investors
There continues to be a cacophony of naysayers, but we have remained optimistic that the United States will again be able to defy predictions of incessant stagnation. There remain monumental challenges to tackle, but economic momentum has accelerated. We believe this could be setting the stage for a sustainable move higher by stocks thanks to relatively attractive valuations, continued solid earnings and improving economic data, and the "Wall of Worry" pervading sentiment. In the past, these ingredients have boosted equities.
Manufacturing continues to impress as the Institute for Supply Management's (ISM) manufacturing survey moved up to 53.9, up from 52.7—where a reading above 50 indicates expansion—while new orders rose to 57.6 from 56.7. The ISM Manufacturing Index has tended to be one of the better indicators of stock market direction over the past several years.
The service sector also continues to show signs of strength as the ISM Non-Manufacturing Index rose to 52.6 from the previous month's 52.0. Additionally, the employment components of both surveys improved, with the manufacturing side rising to the best level since June 2011. The growth rate of manufacturing employment hit a 14-year high last year.
We are encouraged about the economic outlook and believe employment is set to continue to surprise on the upside. We continue to see initial jobless claims staying below the 400,000 mark that is considered a dividing point between an improving job market and a stagnant one. We also got a blowout private sector employment number from ADP (a leading provider of human resource, payroll, tax and benefits administration solutions); its survey showing a gain of 325,000 jobs, the best monthly reading since the survey began in January 2001. The more expansive government report on the jobs picture showed that nonfarm payrolls grew by 200,000 (private sector growth of 212,000); while the unemployment rate fell again, dropping to 8.5%, the lowest level since February of 2009.
Retail sales have held up better than many were expecting, even though the last push into year-end was a little soft relative to the holiday lead-in. And auto sales have continued to improve; which now drives a larger percentage of US gross domestic product (GDP) than residential investment. On that note, housing appears to be at least stabilizing, if not beginning to marginally improve, as inventories have been pared back and interest rates remain at record lows. Finally, the vital growth- and employment-driving small business sector is also showing signs of life. The Wall Street Journal (1/4/12) reported that small business lending was up 18% year-over-year in November, indicating some measure of increasing confidence, although it remains at very depressed levels.
Back to work?
One of the biggest hits to confidence among small business owners has been on vacation as Congress has been absent since the middle of December. The nice respite is about to come to an end, however, as they come back to Washington over the next couple of weeks, ahead of the State of the Union address at the end of the month. Last year saw little accomplished in terms of providing certainty for business owners as both sides of the aisle squabbled over just about everything. And while it is often said that gridlock is good, and in many cases it is, there continue to be some serious issues that need to be addressed. Chief among them is a credible plan to deal with the ballooning debt that resulted in a downgrade of the US credit rating last year. We continue to believe that a mix of spending cuts, a simpler tax code, regulatory cost/benefit reviews, and growth-inducing policies are the best way to tackle this problem, but we have little hope that much will be accomplished this year as elections loom in November.
Important Disclosure
This material is issued by Charles Schwab, Hong Kong, Ltd. The information provided here is for general informational purposes only and has not been reviewed by the Securities and Futures Commission in Hong Kong.
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