A quarterly analysis by Michael Dubis of Michael A. Dubis Financial Planning, LLC.
The stock markets had a fantastic fall up until about two weeks ago, when volatility returned. The Dow and S&P are both up over 6%, while the NASDAQ is up about 11%. European stocks recently took a hammering due to ongoing credit concerns in Ireland, Portugal, Spain, etc.
My sense is that U.S. markets are encouraged by the all-time low interest rates, which have influenced folks to seek riskier investments for a higher return, and a large percentage of corporations have significantly shored up their balance sheets by issuing tons of low-interest rate debt.
Value continues to be created. Right now, most value in the market appears to be a combination of the supply of capital flowing into equities, debt restructuring, and solid earnings. Valuations on equities are historically high, not necessarily overvalued, but there certainly is a premium being paid for stocks again.
I’m concerned going into 2011 that markets will need a strong confidence booster (hopefully, an extension of the Bush tax rate cuts or some other clarity by Congress) to maintain its momentum.
The Economy
Quantitative Easing Part II is now underway. It’s too early to judge the impact, but at a minimum it was supposed to lower interest rates. Unfortunately, that didn’t happen. As I write, 30-year rates are still around 4.5% to 4.75%, which still is ridiculously low.
Unemployment continues to be a major problem, especially going into the holiday season. Initial unemployment claims fell to 407,000, but government published unemployment is still north of 9%. If you include those no longer applying for unemployment or looking for work, we may have approximately 12% to 15% unemployment.
Fortunately, GDP numbers were recently revised upward to about 2.5% from an earlier estimate of 2.0%. Unfortunately, the economy really needs at least 3% GDP in order to add enough jobs to improve the unemployment picture.
Personal income is up by 0.5%, which subsequently influenced spending to increase by 0.4% and savings to go up to about 5.7%. All of these are net positive numbers for the economy, but whether they are enough to return confidence to the economy is another issue.
My sense is that if Congress and the President can come to an agreement on the tax law very soon, we’ll see a lot more “clarity” by small businesses and corporations on what to do with future growth and hiring. Until then, ambiguity remains.
On the negative side of the ledger, housing continues to suffer. Existing home sales fell by over 2% in October. If you look back a year, that’s a drop of over 26%. New homes are also falling by about 8%. Locally, in areas like Middleton, it appears that sales are stable if not strong. This has a lot to do with limited supply, excellent school systems, and relatively reasonable taxes. Other communities unfortunately have way too much housing supply on the market and may continue to face some pain.
Finally, oil and gas have been relatively stable. Let’s hope it stays that way and we don’t get into any additional international crises, especially in the Middle East. An oil spike would have significant influence on our recovery going into 2011.
Local Review
Our IB 100 survey continues to show no one is exceptionally excited about the local or national economies. As of November, we see a very low positive rating, only 3%. The remaining 97% of surveyed think the U.S. economy is either fair or actually poor.
The state perception is similar to the national perception.
Dane County, however, continues to fair much better. We see over 30% feeling good to excellent about the economy, 63% feeling fair about the economy. Only 5% feeling the economy is in poor shape, almost the opposite perspective from the nation overall. This is a good sign for local business.
Recently, we polled our survey group on their perception of the “economic policies and actions of the following government bodies: Federal Government, State of Wisconsin, and Dane County.
In a nut shell, responses were not positive for the Fed and State. The group was overwhelmingly concerned about the actions taken by those governments, as over 60% in both surveys view government actions as poor and 20% to 30% giving fair recognition to their actions. This is consistent with national election results; now we’ll see if those elected can do anything to improve the situation.
Again, however, Dane County receives slight better results, with “only” 46% viewing policies as poor, and over 40% viewing them as fair, and another 10% viewing policies as good. This is consistent with the polling perception of the Dane economy versus the national and state economies.
Looking at Revenues, staffing, expenditures, and charitable goals, we are seeing a somewhat positive trend, albeit very stable.
Unfortunately, 27% of November respondents expect to see their revenue decrease, versus approximately 16% to 18% in October and November. Fortunately, over 73% of respondents expect to see revenue stay the same or increase. That’s a very good sign.
Staffing also is expected to remain stable, if not positive. Over 67% plan to keep staffing at the same level and 18% expect to be hiring. Only 15% expect layoffs.
Expenditures are positive as well, with the overwhelmingly responses, 55%, being stable or actually increasing (20%). Only 25% expect spending cuts.
Finally, charitable giving continues to stay the same, with only 15% expecting to increase charitable giving and 76% keeping it the same. Only 10% expect to decrease charitable giving.
Summary
Across the spectrum, respondents have certainly perked up. There continues to be a portion of our respondents understandably concerned about the local and national situation, but fortunately a large percentage of our respondents foresee greater confidence than a year ago.
Our respondents offer a fair mix of major industries and governments in Dane county. They are key creators of jobs, wealth, and charity. It is good to see this slightly positive change of pace.
Would you like to be surveyed? If you are a key leader or executive in your respective organization, please contact jodyp@magnapubs.com to discuss being put on our monthly survey list. We value your insight and opinions. Our surveys are designed to be broad and diversified among the respective sectors in the Dane County economy.
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