News or Noise? (Waiting for a Turnaround in U.S. Unemployment)
At the moment the pessimists have the floor. Job growth continues anemic. But if U.S. firms are now making as much money as they did in 2007 with 7 million fewer workers, and each incremental hire comes with a raft of newly-mandated, costly employment benefits, the incentive to add to payroll expense is at best elusive.
At the end of this year, U.S. small business owners (who employ nearly 70% of the American labor force) are also faced with escalating tax burdens. Unlike our international small business owner competitors in the Asian and emerging markets, in the U.S. it is more productive today to invest in new capital equipment than to add to the employment rolls. And then there is the looming 3.8% flat tax on investment income for high wage earners, part of the 2,400 page Congressional health care reform legislation. And down the pike is the prospect of a value-added tax (i.e., VAT or national sales tax) with very little demonstrated political interest in controlling Federal government spending. As Margaret Thatcher used to say, "socialism works very nicely until you run out of taxpayers to finance it." Tax policy matters; economic behavior responds to tax incentives, not spending initiatives.
Investor Reticence (Rational Behavior in an Irrational World)
Economists today are in a state of disarray. In the U.S. and Europe, fiscal policy has intruded so deeply into the private sector that conventional mathematical economic equations have lost their relevance and predictive attributes. With many in the global business community now looking to Washington and Brussels for direction, long-term (as well as short-term) business development planning has evolved into a series of strategies to game the political winds. Whereas in the past economists and long-term investors concerned themselves with the direction and physical output of the world's economies, today government policy directives affecting the financial services sector appear to drive the real economy.
Not surprisingly, in such a capricious, politically-tinged atmosphere, business managers and owners sit on their hands and investors with the long view move to the sidelines (today bank and money market accounts total $9.36 trillion, or 75% of total U.S. stock market value). Meanwhile, all participants wait as our politicians "reform" the financial markets under the watchful eye of Wall Street's herd of lobbyists. So cash flows into and out of the investment markets become more a matter of shifting investor psychology responding to media spin interpreting fiscal policy than the fundamental economic outlook. Investor time horizons narrow and "speculation" replaces "investment," volatility increases. Attempting to anticipate investor behavior becomes an essential element in any economist's macroeconomic model. But predicting personal behavior is hazardous, of course, so many economists are reduced to purveyors of sound bytes, hoping to attract media exposure.
Nervousness and Turmoil: Opportunities for Investors
Despite the negative news backdrop, the U.S. economy continues to display signs of strength. Corporate profit growth has broadened from the financial sector initially into the manufacturing and producing segments. Housing indicators have stabilized and temporary hiring measures (often a leading indicator signaling a reversal in the unemployment rate) are improving.
But stock prices have nosedived, appearing to offer attractive opportunities for long-term investors. At 13x 2010 projected earnings per share, and further earnings gains probable next year, equities continue to strike us as very reasonably priced today with the additional benefit of generating dividend yields exceeding money market funds and short-term bonds. However, as we have emphasized in the past, broad diversification in portfolios among the various asset classes continues to be key. Allocations to global investment real estate, natural resources and emerging economies broadens both the downside cushion and rebound potential. We continue to believe that patience and courage will be rewarded in the long run.
Should you have any questions or concerns, please let me know.
Best,
Jim
Jim Joslin is Chairman and CEO of TFC Financial Management, a Boston-based money manager.
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