Monday, February 5, 2007

News - January 2007

The third year of a Presidential term has been a strong period for the stock market in prior years, as evidenced by not a single decline in the S&P 500 during a third year of a term since 1945. This may be because politicians intent on retaining political control for themselves or their party are inclined to stimulate the economy in order ensure support in the next election. This certainly is no guarantee for higher equity prices, but it is a positive sign. In this news update, we would like to address the performances of the various market indexes and also look at some of the economic and political issues on the horizon and how they might relate to the financial markets as well as individual finances.

The market got off to a somewhat sluggish start at the beginning of January as the growth of the economy was in question and inflation remained a concern. As the first few weeks of the year passed, these nagging concerns were somewhat diminished. Commodity prices, specifically oil, fell abruptly at the beginning of the month to levels not seen since 2005.

Oil fell to $50 a barrel midmonth, a whopping 35% below the all-time high prices reached last summer – so it’s no wonder the inflation concerns have relaxed a bit. At the same time, growth as measured by GDP has rebounded to 3.5% annualized, which is an almost unthinkable combination of events. Most of the experts (along with common sense) seem to indicate that the correlation of economic growth and commodity consumption would certainly be positive.

It was reported that oil consumption actually fell 0.6% in the 30-member countries of the OECD, which include the developed countries in North America, Europe and Asia. This is the first reported drop in oil consumption for this group in 20 years. While fast growing consumers of India and China are not included in the OECD numbers, it is still remarkable that oil consumption was lower while these global economies continued to flourish.

The economy also received good news in the form of the jobs data released during the first week of January. The Labor Department figures showed that 167,000 jobs were created in December and that wages increased to an average of $17.04 in December, which was an increase of 4.2% from December of 2005. This was the largest percentage gain in wages since February 2001. This could be a reversal of recent trends that saw corporate profits expanding while workers’ wages were relatively stagnant.

The fact that wages have begun to climb could have the most significance in the year ahead. In recent months, the populist political rhetoric has sharpened as the Democrats and anti-immigration leaning politicians have gained greater influence. One of their principal arguments is that wages and the benefits of a statistically strong economy have not been shared from top to bottom. They argue that the reasons for the uneven distribution are a combination of an influx of foreign labor, outsourcing, reductions of global trade barriers and the very nature of capitalization.

It’s somewhat ironic that the very circumstances that have allowed our economy to grow are also the same forces that promote some of the inequalities among owners and workers. Most economists believe that our society is generally better off economically despite the fact that assets and wages are not divided evenly. However, some have presented examples where CEO’s are now earning 400 times that of a regular employee as compared to just 20 times a few decades ago, which is a compelling case for how a prosperous society doesn’t necessarily seem to promote equality. A continued acceleration in wages is obviously a positive for most workers, but the effects on a corporation’s income statement, and therefore, our investments, will need to be monitored.

At the very least it is partially because of the improved GDP numbers, job growth and tamer inflation data reported this month that enabled the stock market to show some strength. The major indexes finished January in positive territory as the S&P 500 gained 1.5%, the DOW gained 1.4%, and the NASDAQ rose 2.1% by the end of the month. International stocks lagged slightly as the developed foreign markets gained 0.7% while the emerging markets returned a negative 0.6%.

Real estate stocks continued the recent very strong performance gaining 9.9% for the month of January buoyed by merger and acquisition activity. The healthcare and telecom sectors also outperformed the market while natural resources, energy and utilities were slightly negative for the month. It is interesting to note that growth funds of each category outperformed value stocks, which is counter to the recent multi-year trend.

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