Sure, there's a lot of fear-based talk coming out of Washington and Brussels (and Tokyo for that matter), but things are definitely looking up if you care to look beyond the headlines, observes John Reese of Validea Hot List.
While the fiscal cliff talks drag on, the US economy is continuing to make gains in several key areas.
In November, for example, the private sector added 147,000 jobs, according to the Labor Department. That was enough to lower the unemployment rate to 7.7%, the lowest it has been since December 2008.
The so-called "U-6" unemployment rate, which unlike the headline figure takes into account workers who have given up looking for a job or those working part-time who want full-time work, also fell to 14.4%. That's still significantly higher than historical averages, but it's the lowest the figure has been since January 2009.
Industrial production, meanwhile, increased 1.1% in November, according to a new Federal Reserve report. Part of the reason for the big gain was a rebound in production in the aftermath of Superstorm Sandy, which had limited production in some areas the previous month. Still, November's gains wiped out all of October's losses, and more-overall production for November was about 0.4% higher than it was in September, before Sandy's arrival.
The housing market also continues to improve. Existing home sales rose 5.9% in November, according to the National Association of Realtors, reaching the highest level in three years. Construction starts, meanwhile, dipped a bit in November, falling 3%, according to the Commerce Department, but they remain more than 20% above year-ago levels. Permit issuance for new home construction rose 3.6%.
Big news also came from the Federal Reserve. The Fed last week said that, starting in January, it will begin buying $45 billion of Treasury securities per month to support financial markets and bolster the economy. It will continue its ongoing plan of buying $40 billion in mortgage-backed securities per month.
The Fed also took the unusual step of linking its interest rate policy to hard economic data. It said it will keep rates low at least as long as the unemployment rate stays above 6.5%, so long as the projected inflation rate a year or two out doesn't exceed 2.5%. The Fed is thus again expanding its balance sheet in an attempt to boost the economic recovery.
Since our last newsletter, the S&P 500 returned 2.1%, while the Hot List returned 4.1%. So far in 2012, the portfolio has returned 20.2% vs. 14.8% for the S&P. Since its inception in July 2003, the Hot List is far outpacing the index, having gained 171.6% vs. the S&P's 44.3% gain.
Five Reasons for Optimism
As 2012 winds down, the general mood surrounding the market and the economy remains one of fear. The fiscal cliff, unresolved debt problems in Europe, and the lingering scars of the financial crisis and Great Recession seem to be giving pessimism the upper hand over optimism, and keeping investors lukewarm (at best) on stocks.
But as we head into 2013, I think there are several reasons to be optimistic about where we stand. That doesn't mean we aren't facing some serious problems...there is no doubt that the US and much of the developed world indeed have a lot on their plates.
But what it does mean is that overall, a number of factors are combining to make stocks look like attractive investments right now for long-term investors. Here's a handful of those reasons:
The Housing Rebound: It's hard to believe that six years have passed since the housing bubble began to burst, but it's true. And while the nascent rebound hasn't been as dramatic as the decline was, it is significant.
Housing starts are up 21.9% since a year ago. Permit issuance for new home construction is up 28.1% in that period. Existing-home sales have risen 15.5% in the last 12 months, meanwhile, and pending home sales are up 18%.
Home prices are on the rise, too, having jumped 3.6% in the year ending September 30 (the most recent data available), according to the S&P/Case-Shiller Home Price Indices.
That's a big deal. Housing is usually a big part of economic recoveries, but until recently it's been absent from this one. The sector's impacts are so wide-ranging-impacting everything from construction companies to carpet manufacturers to home-furnishing stores-that housing market improvements can lead to the creation of thousands and thousands of jobs.
Employment: It's no surprise, then, that the housing recovery has been accompanied by a significant improvement in the jobs market. Yes, unemployment is still far too high, but we've seen real progress lately. The headline unemployment number (7.7%) is down a full percentage point from a year ago, and more than two full percentage points from where it was two years ago.
The broader "U-6" measure (which also includes workers who have given up looking for a job or those working part-time who want full-time work) is down 1.2 percentage points in the past year, and 2.5 points in the past two years.
More employed workers means more people with money to spend. More people with money to spend means more profits for consumer-related businesses, which drive our economy. More money for them is leading to more jobs, which leads to more people with money to spend-and so on goes the cycle.
As the fiscal cliff mess gets resolved, the hiring may well increase even more. Many companies have been staying in a holding pattern until they get clarity on tax policy and government spending plans. They want to know the rules of the game-whatever the rules may be-before they start to really play.
If Congress and the President can reach some sort of agreement that lays the tax and policy rules out for them-whatever it involves-businesses may have the clarity they need to start spending their cash on new employees, and capital improvements.