Dow Breaks Through 9,000 - S&P 500 Breaks 1,000

The cover of the August 3^rd issue of Newsweek declared “The Recession is Over.” The only problem is that it doesn’t feel like it is over. Let’s first look at some of the good news:

·        We’ve had a July to celebrate in the markets

                        Dow                 +8.9% (best month since Oct 2002)

                        NASDAQ        +7.5% (best July in 12 years)   

                        S&P 500          +8.1% (best July in 12 years)

·        Second quarter GDP number of -1.0% was much improved from the prior two quarters. With improving GDP, some are interpreting this as a signal that the recession is waning.

·        New home sales jumped 11% in June. This represents 3 straight months of increases.

·        The “Cash for Clunkers” program has been so successful that it has already run through its first billion dollars. Car sales have been off the charts and Congress will probably approve an additional $2 billion.

·        Two thirds of the S&P 500 companies have reported second quarter earnings, and more than 74% have beaten expectations.

Reasons for CAUTION

·        Unemployment, even though a lagging indicator, continues to worsen, and will likely exceed 10% (9.5% as of June) before the pendulum swings back.

·        The U.S. federal deficit is above any previous level reached in peacetime. The budgetary shortfalls will likely push up long term interest rates.

·        Deflation or Inflation? Hopefully, the Fed can stave off deflation (the worst of all possible worlds) in favor of inflation. The massive government spending is likely to head to inflation several years in the future. This is unlikely to be a short term problem because there is no pressure on higher wages. Energy and housing prices appear stable as well.

·        The FDIC closed 5 banks last week bringing the total to 69 for the year.

·        Commercial real estate debit defaults have yet to be dealt with.

·        State and municipalities have debt problems still looming, e.g., the state of California

·        Higher individual income taxes, both federal and state, are on the horizon.

SUMMARY AND CONCLUSION

As a firm we are encouraged by the fact that government action averted a financial system meltdown and economic disaster, albeit with a high price. But the patient (the economy) is off the critical list and about to be discharged. The prescription for full recovery is still being written.

We do believe that even if the recession isn’t over yet, it has turned the corner. We may see positive GDP in the third quarter or the fourth quarter for sure.

The stock market surge, which began on March 9^th, has pushed the markets up about 40% off its lows, and lifted everyone’s emotions. We are feeling better as a nation.

As mentioned there are serious headwinds to face, and more rainy days to come. But let’s enjoy the sunshine from the positive markets, but keep our umbrellas handy.

Be well and enjoy the rest of the summer!

Edward J. Kohlhepp, CFP^®, ChFC, CLU

Edward J. Kohlhepp, Jr., CFP^®, MBA