Downturns, Recoveries and Portfolio Income

The most unpleasant part of investing in stocks is definitely the periodic pullbacks. Unfortunately, these are part of the price we pay for more money in the long run.

When the stock market is going up, everybody feels good about being a long-term investor. It is the downturns that test all of our nerves and our belief in long-term investing. As one pundit put it – we can then see who the long-term “owners” of stocks are as opposed to the shorter-term “renters.”

Currently the S & P 500 is around 1946, down about 8.6% from its peak in May of 2015. The low point of the current correction was on 2/11/16, when the S & P was down about 14% from its peak. As a refresher, a correction is defined as a -10% to -20% retracement from a previous peak, and a bear market refers to a decline of more than -20%. We are currently in the 35TH correction or bear market since 1945, and during this time these have occurred about every 2 years on average. Prior to the current correction we had gone almost 4 years without a 10% pullback, so our memories of this sort of negative volatility had begun to dim.

Considering market declines of between 10% and 20% since the end of World War II, the average percentage decline is -13.8%. The average time to recover back to the previous peak level was 3.6 months from the low point. The correction we are experiencing is currently about average in magnitude, and if it were to follow historical averages we would expect a recovery sometime in early summer. Nobody knows for sure whether things will get worse before they get better, but studying past market conditions gives us some context as to the range of potential outcomes.

What do we do in the meantime? If your asset allocation is 100% stocks, we recommend that you stay with it or, if you have the ability, take this opportunity to add to your portfolio with monthly deposits (such as to your 401k or Roth IRA), periodic bonuses or other savings. If your chosen asset allocation includes fixed income, then we periodically rebalance to your target mix and add money to stocks at temporarily depressed prices.

In our portfolios that contain individual stocks, our recipe is as follows: start by focusing on high quality companies with the potential for rising earnings and dividends. Combine 35-45 such companies into a well-diversified portfolio. Regardless of what happens in the stock market over the next year, your portfolio income should be higher each subsequent year. The management teams of high quality companies with long track records of dividend increases are very reluctant to cut their dividends. Even in a recessionary environment, more companies should increase their dividends than maintain or cut them. There are many well-known companies that have increased their dividends every year for 25, 35, 50 or even 60 consecutive years. You may already own some of these companies, especially if you are a Parsec client.

Total return is comprised of two components: income and price appreciation. Over long time periods, the income component of total return has represented just under half of the overall return of the stock market. However, the variability of the income return has been much lower than that of the appreciation component. By focusing on those companies that we believe are likely to have consistent dividend growth over time, particularly for those of our clients who are retired and spending from their portfolios, we are setting up a condition where there is less uncertainty about a significant component of their overall return. For our clients with large cap mutual funds instead of individual stocks, the same general premise applies.

The equity portion of our client portfolios also includes small-cap, mid-cap and international companies, which we invest in primarily through pooled vehicles such as mutual funds and exchange-traded funds (“ETFs”). The fixed income portion is also well diversified, with a focus on short-to intermediate term, high quality instruments along with some high yield and international bonds for diversification and yield improvement.

We encourage our clients to focus on this concept of rising portfolio income to meet their investment goals and provide peace of mind during the inevitable corrections and bear markets that we will all experience at some point.

William S. Hansen, CFA
President
Chief Investment Officer

Bill

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Remain calm and carry on: why stocks and stress don’t mix

The popular press is generating a lot of recession-related articles lately and with stocks starting the New Year on a weak note, it’s no wonder investors feel a little nervous. Year-to-date, U.S. large cap stocks are down about 10% while most international markets are down even more. Commodities continue to slide and global economic growth has been revised lower. This is certainly not a confidence-inspiring picture, but here’s why keeping calm and carrying on is the best course of action.

First, I want to illustrate why stocks and stress don’t mix. Let’s say that stocks are down 10% year-to-date, the global growth outlook is muddy at best, and you’re seeing a lot of articles suggesting that the US is headed for a recession. Assuming the above facts and a meaningfully-sized investment portfolio, most humans are likely to feel anxiety, stress, and maybe some fear. Is the market going to fall further? Are we heading for a recession?

Having read enough about neuroscience to be dangerous, I know that when we’re feeling anxiety, stress, and fear, the more evolved part of our brain – our neocortex – is usually off-line and the more primitive part of our brain – our limbic system or brain stem (a.k.a. lizard brain) – is typically running the show. When our lizard brain is calling the shots we often make poor, fear-based decisions because we can’t see the big picture. Our brain shuts down and we become reactive instead of proactive. In these instances our capacity to think higher-level thoughts is greatly reduced.

Speaking of the big picture, did you know that from 1926 – 2015, stocks have delivered average annualized returns of 10%? Notice that includes the two largest US market declines, the Great Depression, and the Great Recession. Not bad. When we get triggered by stress, facts like these can get overlooked and we could make decisions we’ll come to regret. Here’s a schematic of how that might look:

graph 1

You can see how our thoughts and emotions affect our behavior which then reinforces the above pattern or one like it. Unfortunately, the outcome stinks and so I’d like to propose an alternative – – one that leads to a much happier, healthier outcome.

In the alternative pattern, the same triggering event happens, only this time you’re aware of the stress and anxiety it triggers. The fact that you’re aware of the stress and anxiety is huge! It means you’re not identifying with the emotions and thus your rational-thinking, neocortex brain is still online. You now have choices. Given the old pattern, one strategy would be to call your advisor and get some reassurance that the sky isn’t falling. Another option is to simply turn off the TV or the computer and take some deep breathes. Maybe take a walk around the block or engage in an activity you enjoy. The point is to interrupt the old pattern. The more you can do this, the more your awareness grows, and in turn, the more options you have.

Following through with this example you can see that giving yourself a break from the triggering event and getting some perspective allows you to stay calm, and thus make better decisions. Just like the first illustration, when repeated, this one will also reinforce itself. And the outcome is much better.

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So now that you’re hopefully in a calm, peaceful state, we can talk about the current environment. Yes, stocks have gotten off to a shaky start but the US economy remains on stable footing. Jobs growth is strong, oil prices are low, consumer debt is in-check, and wage growth is finally starting to rise. It’s true that US manufacturing is contracting but it only accounts for about 12% of GDP. Meanwhile, US services sectors, which account for 88% of GDP, remain in expansion mode.

Stocks have been spooked by falling commodity prices, slowing growth in China, and fears of deflation. But most leading indicators remain strong and every recession since the 1970’s has been preceded by a spike in oil, not a decline. Finally, and speaking of perspective, there will always be some risk of recession simply because contractions are a natural and a healthy part of any business cycle. Without them we can spiral out-of-control into bubble-like environments. I for one intend to stay calm and carry on. Nothing else seems to help anyway.

Carrie A. Tallman, CFA
Director of Research

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Market Update Through 12/31/2015

Total Return

Index

12 months YTD QTD

Dec

Stocks
Russell 3000 0.48% 0.48% 6.27% -2.05%
S&P 500 1.38% 1.38% 7.04% -1.58%
DJ Industrial Average 0.21% 0.21% 7.70% -1.52%
Nasdaq Composite 6.96% 6.96% 8.71% -1.92%
Russell 2000 -4.41% -4.41% 3.59% -5.02%
MSCI EAFE Index -0.81% -0.81% 4.71% -1.35%
MSCI Emerging Markets -14.92% -14.92% 0.66% -2.23%
Bonds
Barclays US Aggregate 0.55% 0.55% -0.57% -0.32%
Barclays Intermediate US Gov/Credit 1.13% 1.13% -0.73% -0.35%
Barclays Municipal 3.64% 3.64% 1.66% 0.77%

Commodity/Currency

Current Level Prior QTR Level TTM High

TTM Low

Crude Oil

$37.04

$45.09 $65.61

$33.77

Natural Gas

$2.34

$2.52 $3.57

$1.81

Gold

$1,060.20

$1,115.20 $1,305.70

$1,045.40

Euro

$1.0863

$1.1163 $1.1835

$1.0522

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Time for an Economic Sabbath?

After feeling somewhat exasperated while watching a reputable financial news program last week, an idea occurred to me: we need to re-introduce the Sabbath. Not in the religious sense of the word, but as a general day of rest from financial or economic progress. The notion struck me after hearing a reporter express dismay over a softer-than-expected read on some monthly economic data point. While I realize the media is paid based on viewer ratings and that doom-and-gloom stories attracts more attention than upbeat forecasts, it would still be nice to acknowledge what’s going right every now and then. And I think it would also be beneficial.

As everyone knows, our market system is based on capitalism. Lesser known is that we’re in a period of what’s called “growth capitalism.” But this hasn’t always been the case. Merchants only started tracking growth metrics during the Industrial Revolution, according to the book, “The Economics of Good and Evil.” Capitalism, as defined by my Google search, is an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.   Notice that there’s no mention of the word “growth”. Now, I’m all in favor of growth, but with purpose and ideally, some periods of rest. Because growing all the time without set-backs, pauses, and most importantly, reflection, is unsustainable at best and dangerous at worst.

Dangerous because if growth must be achieved at all costs, debt often results as an unintended consequence. When nations and even individuals feel the need to grow for the sake of growth, they often go to extreme measures, often taking out more debt to meet unrealistic targets. For nations who have an independent Treasury, they are able to manufacture more paper money and at least temporarily out-run mounting debt levels. Individuals aren’t so fortunate – or are we? Knowing we can’t manufacture our own currency out of thin air, most individuals curb spending and debt issuance and work to live within their means. We ideally accumulate rainy-day savings funds for when growth naturally slows down or declines, i.e. a job loss or unexpected expense comes up.

But back to a financial or economic Sabbath. It seems in our modern-day society where growth is the undisputed law of the land we frequently fail to appreciate what is going right. We’re so afraid of not hitting the mark that we neglect to notice job growth is on the rise, unemployment is pretty darn low, and the housing market is on the mend. Sure there are plenty of problems that need attention, but acknowledging and even appreciating our relatively healthy economy in no way negates the problems. I would argue that focusing on what’s working and improving actually gives us more energy and capacity to better work with prevailing problems.

Finally, instituting a financial or economic Sabbath, if even on an individual level, allows us to shift from a deficit mentality to one of “enough.” As I reflected on the financial news program that got me thinking about a Sabbath, I realized that having to always meet certain growth targets implies a belief that our current situation is not okay, i.e. a deficit mentality. And interestingly, this mentality is prevalent at a time when debt as a percent of GDP has never been higher. It seems we’re creating what we fear the most – a big ole’ deficit.

Fortunately, things aren’t as bad as the media would have us believe and it’s not too late to stop and smell the flowers. Individually taking stock of what is working and how much we do have (we live during the wealthiest period in the history of the world) can start to reverse our collective deficit mentality and maybe turn the tide towards sustainable, purpose-driven growth.

 

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Carrie A. Tallman, CFA
Director of Research

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THE GREEK MESS WON’T HURT THE US ECONOMY

The International Monetary Fund (IMF) has performed a valuable public service by publishing a detailed “Debt Sustainability Analysis” for Greece on July 2. While this document is written in typically dry “bureaucratese,” it lays bare the failure of the strategy of “kicking the can down the road” that the other Euro Zone countries have been using with Greece for the past five years.

Dr. Carl Weinberg is Chief Economist at High Frequency Economics and a veteran of the mostly successful Brady Plan debt restructuring program of 1989-1992. Those negotiations took debt loads that were impossible and restructured them, in a manner similar to the way failing corporations are restructured in the US. Brady Plan deals were worked out for Argentina, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Ivory Coast, Jordan, Mexico (the first one in 1989-1990), Nigeria, Panama, Peru, the Philippines, Poland, Russia, Uruguay, Venezuela and Vietnam.

Dr. Weinberg suggests that the €323 billion ($358.3 billion) Greek debt be restructured into bonds with a maturity of 100 years, a coupon (interest) rate of 5.0 percent and a 25-year grace period before the first payment is due. This would give Greece “breathing room” and would keep all its creditors (primarily the European Central Bank (ECB), the European Financial Stability Facility (EFSF) and the IMF) from having to take a “haircut” on their holdings of Greek debt.

Not very surprisingly, the IMF analysis does not go this far. However, it rather drily suggests that extending the grace period to 20 years and the amortization period to 40 years (an effective doubling of each) together with new financing, would barely be adequate.

Greek voters went to the polls on July 5 in a hastily arranged referendum to vote “yes” or “no” on accepting terms from the creditors that were withdrawn on June 30. Thus, it’s not really clear what they were voting on. The wording in the ballot was also very confusing. It read: “Should the draft agreement submitted by the EC, ECB, IMF to the eurogroup on June 25, which consists of two parts that make up their full proposals, be accepted? The first document is titled, ‘Reforms for the Completion of the Current Program and Beyond’ and the second ‘Preliminary Debt Sustainability Analysis.’”

Despite that convoluted wording (it can’t possibly be any clearer in Greek), the 62.5 percent of voters who turned out gave a victory by a 61.3-38.7 percent margin to all those wishful thinking people who believe that reality won’t triumph. Greece is being kept afloat by the ECB. If they stop doing that, the banks will all be bankrupt. No one knows where this disaster will go.

Now the creditors need to follow the IMF recommendations, which include another €60 billion ($66.5 billion) of new money through 2018. This is in addition to the restructuring of all the existing debt.

Like so many economic problems in the world, the Greek mess will be finally resolved when there are no other options. If Greece were to leave the Euro Zone (a terribly complicated exercise), it would be hit with horrendous inflation and an even bigger collapse of the economy that the 25.0 percent decline it has already experienced since 2009.

Greece needs debt relief. It also needs to reform its ridiculous pension system to conform to those of the rest of the Euro Zone and figure out ways to collect taxes that are owed.

The Greek economy is about $200 billion a year in real GDP. That’s close to Alabama ($199.4 billion in 2014) or Oregon ($215.7 billion). Both are 1.2 percent of the US total.

A failure to follow something like the prescriptions of the IMF or Dr. Weinberg will condemn the Euro Zone to remain mired in a recession that began in the first quarter of 2008. Some people would argue that a recession lasting that long ought better be called a depression.

Either way, whatever happens to Greece is mainly a problem for the Euro Zone. It is simply too small an economy to have a major impact on the US. Most of whatever impact there might be would come through damage done to overall Euro Zone growth, rather than directly from Greece itself.

Dr.  James F. Smith, Chief Economist.

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Economic Predictions and Investment Decisions

The economy is an important factor that drives both capital markets and personal financial decisions. While we continuously monitor the latest economic news, have an opinion about the direction of markets, and incorporate these factors into our stock selection process, market or economic predictions do not drive us to make tactical shifts in your portfolio allocation.

We often hear, “What do you think the market will do this year?”

After a hefty caveat that the future is unknowable, and short-term market predictions can be hazardous to your wealth, we usually talk about the current economy, how it might affect markets in the near-term, and then provide a more intermediate-term view of the health of the U.S. and global economies.

Our investment philosophy hinges on the abiding belief that an investor should not attempt to time the market. That’s to say that an investor should not move his or her money in and out of asset classes based on economic predictions, or beliefs about what the market may do over the next few years. Rather, when we make decisions in a client’s portfolio, it is based on two factors: 1) asset allocation – based on the client’s financial goals and risk tolerance; and 2) individual security selection – used to comprise the contents of the asset classes that have been prescribed for the portfolio.

An investor’s asset allocation, if chosen correctly, shouldn’t fluctuate based on changes in the economic landscape. Instead, asset allocation should be reviewed regularly and modified if the individual’s financial situation changes. It’s the second of these two – security selection – where a bit more prognostication comes in. To be sure, we are fundamental analysts. We look at a company’s earnings, growth potential, balance sheet and cash flows relative to its price to determine whether or not the stock represents a good buying opportunity. Understanding the economy helps us understand those companies better. It helps us determine what the growth drivers of a certain sector may be, and what the consumer trends may look like for a given company. Understanding the economy is a critical component of our stock selection process.

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Our Chief Economist, James F. Smith, provides insight to Parsec’s clients regarding the local, national and global economy. We appreciate Jim’s experience and perspective on economic matters, and we believe our clients enjoy getting to know him at various engagements, and of course hearing his entertaining, plain-spoken and informative economic speeches.

Recently, Jim was featured in an Asheville Citizen-Times article called “The Wisdom of Mr. Smith” about his success predicting housing prices. Way to go Jim! You can read that article here:

http://www.citizen-times.com/story/money/business/2015/05/08/asheville-economist-nations-top-housing-forecaster/26975203/

While economic predictions don’t drive us to make tactical shifts in our portfolio allocation, economic factors do play an ongoing role in our security selection process. To see Jim’s economic commentary each quarter be sure to read our newsletters. Back copies can be found here: http://www.parsecfinancial.com/news.html

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GREAT NEWS ON INCOMES, SPENDING AND INFLATION

The Bureau of Economic Analysis (BEA) hit a trifecta in its March 2 release, “Personal Income and Outlays: January 2015.” As the chart below shows, the first piece of wonderful news was that real disposable personal income (DPI), which is what you have left of your income after taxes and inflation, hit a new record in January of $12.246 trillion at a seasonally adjusted annual rate. That finally eclipsed the old record of $12.214 trillion at a seasonally adjusted annual rate set in December 2012. That old record was an unsustainable outlier at the time, which was caused by many people who had the ability to bring income such as bonuses and special dividends forward to avoid the higher tax rates of 2013, doing exactly that.

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Conversely, the January 2015 record was driven by a seasonally adjusted increase of $42.4 billion in wage and salary income from December. That accounted for a very healthy 83.5 percent of the total increase in personal income of $50.8 billion, seasonally adjusted. That strong performance of wages and salaries suggests that, driven by ever-growing employment, disposable personal income will set many more records in 2015 and 2016.

Even more astonishingly, real disposable personal income rose by 0.9 percent in January from December. That was the biggest increase since—you guessed it—the 2.84 percent spurt in December 2012, which was on top of a very strong increase of 1.44 percent in November 2012. Of course, real DPI plunged by 5.9 percent in January 2013, the biggest drop in over 50 years. That is most unlikely to occur this time, as we will see when we get the data for February 2015 on March 30.

This 0.9 percent increase in real DPI in January is even more amazing, because January wages and salaries are hit every year by increases in Social Security taxes on both employees and employers. Every employed person who exceeded the $117,000 taxable maximum in 2014 before December 31 had to start paying again on January 1. This year the tax covers wages and salaries up to $118,500. That change subtracted an additional $7.9 billion in January.

Note the phenomenal growth in real DPI in the previous chart. It is now six times higher than in 1959, triple the 1973-1975 level and double where it was in 1987-1988. It’s up more than 20 percent since 2009. Most countries would be delighted to have such terrific growth in DPI over comparable periods.

The second piece of great news in the report was the fact that real personal consumption expenditures (PCE) set a new record in January of $11.164 trillion at a seasonally adjusted annual rate, as shown in the following chart. That was up 0.3 percent from December and a very impressive 3.4 percent from January 2014. Because real PCE makes up by far the largest share of real GDP (68.2 percent in 2014), this strong beginning to 2015 reinforces the consensus forecast that this will be the first year since 2005 to see real GDP growth of 3.0 percent or more.

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The third piece of wonderful news was the continued low rate of increase of so-called “core” inflation, the implicit price deflator for PCE less food and energy. The chart below shows how this measure rose in the late 1970s and early 1980s hitting a peak of 4.02 percent in January 1981. It is probably not a coincidence that that was the month when President Reagan took office, as his first official act was to deregulate oil prices. While both energy and food are excluded from this index, the impact of that decision had far-ranging consequences in reducing inflation.

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The overall PCE deflator fell 0.5 percent in January from December and was only 0.2 percent above January 2014. That was primarily because “Energy goods and services” registered price declines of 10.4 percent in January from December, and fell a whopping 21.2 percent from January 2014.

This very small increase in the overall PCE deflator made a big contribution to the 0.9 percent jump in real DPI. The rest came from the large increases in nominal income.

This BEA report is one of the best ones we’ve had in many years. It should be followed by much more good news on income and spending by consumers in coming months.

Dr. James F. Smith
Chief Economist

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Kit Kats, Blow Pops, and the Benefits of Diversification

“But international stocks are underperforming the S&P 500! Why are you buying international mutual funds in my account?”

We hear this question a lot. People often wonder why we include various sectors and asset classes in our portfolios, but the one that tends to get the most scrutiny is international equity. Many investors exhibit what is known as “home bias,” or the tendency to invest primarily in domestic securities, whether it stems from a nationalistic desire to “buy local” or simply the belief that international investing carries additional costs and complexities. Often, investors eschew international diversification to their detriment, as many studies have shown that the inclusion of international equities lowers portfolio volatility while increasing risk-adjusted return. However, these metrics are not what investors see – they see performance. They see that the return on their international fund is lower than the return on the S&P 500 and fear that it will be a drag on their returns forever. So why don’t we sell it?

Quite simply, we keep it for the diversification benefits. With Halloween just around the corner, perhaps an analogy will help. When you’re trick-or-treating, you knock on the door of every lighted house and collect as much candy as you can carry home. Then you dump it out on the floor and sort through it to revel in the spoils. Hopefully you’ll come home with lots of chocolate candy bars, M&Ms, Milk Duds, Junior Mints, and Reese’s cups. Then there might be a smattering of Smarties, Starburst, and Skittles, which are fine. Invariably there will be a few of those orange and black-wrapped peanut butter taffies, some chalky Dubble Bubble and a handful of Dum Dums – but that’s OK. A few crummy candies won’t ruin the night, since you have so much more of the good stuff. And you never know which houses are going to hand out what candy, so you have to hit them all. (And to the person handing out raisins, just stop. Don’t be that guy.)

Now imagine that your portfolio is a bag of Halloween candy. Even if you love Snickers, it would be pretty disappointing if your entire haul was nothing but Snickers – that would defeat the purpose of trick-or-treating, because you could simply go to the store and buy a bag. No, you want a wide variety from which to choose, based on changing moods and cravings! In a similar way, you need to diversify your investments so that the mood of the day doesn’t destroy your savings in one fell swoop. If your entire portfolio consists of the stock of one bank and the bank goes under, you lose all of your money. If you buy the stock of 5 different banks, but the entire banking industry hits a rough patch, your portfolio plummets…so you buy the stock of 40 different companies in different sectors and industries to spread the risk. But what if they’re all domestic companies and the domestic economy tanks? I think you see where this is going. Different investments zig and zag, moving in opposite directions simultaneously, which dampens the overall volatility of the portfolio.

You may not be a huge fan of Blow-Pops, but what happens if you fill your bag with Kit Kats and you’re suddenly in the mood for Sour Apple? What if you leave your bag in the sun and all the Kit Kats melt? It’s true that if particular sector (such as international equity) underperforms and you have it in your portfolio, you might get a lower return on your portfolio for that period. But when that sector rallies, you’ll be happy you had a couple of Blow-Pops in your bag.

Sarah DerGarabedian, CFA

Portfolio Manager

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Fears of a “Summer Pause” Prove Ephemeral

Many analysts, pundits and prognosticators were sounding alarms about “cautious consumers” and “threats to continued economic growth” after the Census Bureau reported on August 13 that both retail sales and the broader category of retail and food services sales in July were almost exactly what they had been in June. In other words, both categories were flat from month to month. Even more depressing, June was confirmed to have only increased 0.2 percent from May.

Those of us with more experience and greater knowledge of the volatility of these series cautioned against making snap judgments. We recommended waiting for the next release before becoming concerned about consumer spending, which makes up by far the largest share of GDP (68.5 percent of nominal GDP in 2013). The retail and food services part is about half of total personal consumption expenditures.

As is nearly always the case, this advice proved sound when we read the Census Bureau release of September 12. As the chart shows, not only did retail and food services sales set a new record of $444.7 billion in August, seasonally adjusted, but also both June and July were revised to be much larger than previously reported.

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July sales are now $ 441.8 billion on a seasonally adjusted basis, up 0.3 percent from June, rather than the originally reported $439.8 billion or 0.0 percent. June is now reported up 0.4 percent rather than 0.2 percent to a total of $440.3 billion rather than $439.6 billion, seasonally adjusted.

For the first eight months of 2014, total retail and food services sales were $3.46 trillion, up 3.7 percent from the same period in 2013. The biggest gain was at auto and other motor vehicle dealers, where sales were 8.0 percent ahead of the first eight months of 2013.

There are several reasons for this. One is that the average age of the 253 million vehicles we own (the “fleet”) is the highest ever, about 11.4 years. Another is that consumers have record levels of income and near-record levels of employment. A third is that banks, car dealers and credit unions are all competing to finance vehicle purchases at very good terms, including low rates, relaxed credit standards and maturities as long as eight years to keep monthly payments down. A fourth reason is that some measures of consumer confidence, while far from record levels, are at the highest point since the recession ended in June 2009.

Nonstore retailers (think catalog and internet stales) are up 6.5 percent from the first eight months of 2013 to $300.9 billion. That amount is 71.3 percent of the total for general merchandise stores ($421.6 billion) and nearly triple the $101.9 billion at department stores, where sales are off 2.5 percent from the first eight months of 2013.

We should see a record holiday shopping season in 2014. That will keep retailers smiling and contribute to several more quarters of real GDP growth above 3.0 percent at a seasonally adjusted annual rate, which is now the consensus for the first time in this expansion. That will be very good news if the economy follows that forecast. We’ve all been waiting impatiently for the US economy to break out of the subpar 2.1 percent a year growth path it’s been stuck in for the five years since the recession ended.

Dr. James F. Smith

Chief Economist

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Market Update Through 6/30/2014

as of June 30, 2014
Total Return
Index 12 months YTD QTD June
Stocks
Russell 3000 25.22% 6.94% 4.87% 2.51%
S&P 500 24.61% 7.14% 5.23% 2.07%
DJ Industrial Average 15.56% 2.68% 2.83% 0.75%
Nasdaq Composite 31.17% 6.18% 5.31% 3.99%
Russell 2000 23.64% 3.19% 2.00% 5.32%
MSCI EAFE Index 23.57% 4.78% 4.09% 0.96%
MSCI Emerging Markets 14.31% 6.14% 6.60% 2.66%
Bonds
Barclays US Aggregate 4.37% 3.93% 2.04% 0.05%
Barclays Intermediate US Gov/Credit 2.86% 2.25% 1.23% -0.07%
Barclays Municipal 6.14% 6.00% 2.59% 0.09%
Current Prior
Commodity/Currency Level Level
Crude Oil  $105.37  $102.71
Natural Gas  $4.46  $4.54
Gold  $1,322.00  $1,246.00
Euro  $1.36  $1.36

Mark A. Lewis

Director of Operations

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