vaughnwoods

 

The economy is in rebound mode. Risk taking has been growing and hope exists where none existed before. Since March 2009, the S&P 500 has nearly doubled from its low. In retrospect, the dramatic recession of 2007-2009 could have been worse. Consumer spending declined a mere 1% last year thanks in large part to government intervention. A 2.6% increase in government worker compensation, a 13.7% increase in government transfers (i.e. unemployment compensation and entitlements) and a sharp decline in personal tax payments all buoyed consumer spending.

Consumer spending is the fundamental data point for an American recovery. Consumer confidence, a barometer for consumer spending, is growing again, albeit more slowly than in previous recoveries. Next year, a deceleration in government wage growth, a moderation in government transfer payments and a faster growth rate in tax payments versus incomes, may slow consumer spending. Californians, for example, may feel squeezed next year as Governor-elect Jerry Brown will likely raise taxes and cut spending in an effort to deal with the state’s $28billion deficit.

When dealing with deficits, conventional wisdom suggests that higher-taxes reduce deficits. Paradoxically, lowering taxes (and thereby boosting GDP) can also solve deficit problems, as shown by Ronald Regan in the 1980s. President Obama seems ready to try both strategies: (1) keep taxes low now, and (2) let taxes increase in 2013. Whether or not this strategy pays off will depend on how the economic recovery plays out over the next two years. Some analysts are estimating the S&P 500 to generate $94.90 in earnings next year. If these numbers turn out to be correct, the S&P 500 could hit 1423 in 2011, assuming a 15x multiple. One analyst at Deutsche Bank is forecasting $96 in earnings for the S&P 500 with a 1550 price target by the end of next year. Credit Suisse estimates are relatively tempered with a predicted $91 in earnings for the S&P 500 next year and a trading range with a high-end of 1300.

In summary, 2011 is anticipated to be a moderate up year. Remember though, even bull markets must test the low-end of a trading range. An approximately 10% correction to 1100 would be a healthy pause for this market and could create attractive entry points for stocks.

I wish everyone a Merry Christmas and Happy New Year. I am thankful for wonderful clients, family, friends and staff. Even as the economy continues to recover, there are still millions of Americans who have lost their homes, jobs, confidence and quality of life. May these good and productive people find the work opportunities they desire in the New Year.

Best Regards,

Vaughn L. Woods, CFP®, M.B.A.

*Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views off Delta Equity Services Corp. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0118

The following sources were used to research and write this newsletter
-Marketedge.com, Pershing NetExchange Pro, Bloomberg, Credit Suisse, Briefing.com

-Credit Suisse, US Equity Strategy 12/15/10