by Shawn Narancich, CFA
Vice President of Research
A “He Said, She Said” Kind of Market
In a week when stock prices swung back and forth based on press conferences and proclamations about ongoing “fiscal cliff” negotiations, investors are left to conclude that markets are being held hostage to politics. Against this backdrop, stocks struggled to gain traction and benchmark Treasuries remained well bid. The fiscal uncertainty weighing on investors continues to manifest itself in the real economy. Notwithstanding an upwardly revised third quarter GDP number, details underlying the 2.7 percent growth rate point to a low quality recast. A large portion of the improvement came from inventory builds greater than first estimated, while both consumption spending and private sector investment were weaker than first thought.
It’s Not What You Make, It’s What You Spend
Another detail in this week’s GDP report is worth mention – a lower-than-expected trade deficit for third quarter that subtracted less from the economy than first thought. We know that the U.S. economy is beginning to benefit from a recovery in housing, but what gets less press is how the renaissance of the U.S. energy industry is reducing our nation’s oil import bill. With half of our trade deficit currently attributable to oil imports, the shale boom that is boosting domestic oil and gas supplies promises to increase U.S. energy self sufficiency and create economic tailwinds. Investors are wise to discount fiscal contraction, but the Fed-engineered housing rebound and Yankee-inspired energy rebirth promise to provide key offsets to an otherwise sluggish U.S. economic outlook.
A Well-Worn Can
As fiscal cliff posturing continues to play out domestically, Europe congratulated itself on a new agreement to keep Greece solvent. The latest bailout package defers principal repayments, reduces interest rates, and approves another cash advance to this country whose economy continues to implode. Slowly but surely, Greece’s disastrous economy is washing up on the balance sheets of countries like Germany and France, where taxpayers will ultimately foot the bill for Greece’s transgressions. For now, that battered can is again kicked down the proverbial road.
A “Special” Year
While corporate executives may not be able to forecast the details, they know that tax rates are likely to rise, and with this knowledge, they are speeding the return of capital to shareholders. So far this year, U.S. companies have declared over 170 “special” dividends, which are cash payouts in addition to the typical quarterlies that have in many cases also been increased in 2012. This week, Costco, Las Vegas Sands, Guess and Whole Foods Market joined the parade, aiming to make payouts advantaged by a low 15 percent dividend tax rate likely to end soon.
The economic calendar picks up pace next week, when investors will glean the latest read on U.S. manufacturing and labor markets, key readings that may put additional pressure on policymakers to resolve the fiscal cliff.
Our Takeaways from the Week
- Posturing over the fiscal cliff took center stage as stocks struggled to advance
- The U.S. economy remains in slow-growth mode, but with important underlying supports that should help ameliorate increasing fiscal headwinds