Despite a turkey performance from the stock market last week, we still have a lot to be thankful for.

Stocks declined nearly 5%, with the S&P 500 giving up 4.69% and the Dow losing 4.78% as panic overtook the financial markets. The selloff was enough to drive the 10-year U.S. Treasury down to a 1-handle at 1.966%. Interestingly, gold once again proved to be no safe haven, dropping 2.27%. Not only was the “not-so-super committee” unable to reach an agreement on the needed $1.2 trillion in budget cuts, but also the debt situation in the euro zone worsened.

The latest exodus from equities suggests that investors are gripped by fear and perhaps don’t recognize how much there is to be thankful for. Three years ago at this time, the United States was standing on the precipice of a great economic depression. While we are still feeling the effects of such a precarious situation—high unemployment and bloated government debt—we are incredibly lucky to have undergone a recovery, albeit incomplete.

More Feast Than Famine
Consider GDP growth in 2011. For the first quarter, GDP grew a paltry 0.4% annualized. Then, in the second quarter, GDP picked up speed and rose 1.3%. And we just got the final numbers for third-quarter GDP. While the data were revised downward significantly from estimates, coming in at 2% annualized, they show a continuing trend of improving economic growth. It is important to note that final sales—which can be viewed as an indicator of the strength of domestic demand because it represents GDP minus inventories—did not get revised downward along with overall GDP. Rather, it remained at a 3.6% annualized rate, a faster clip than the previous two quarters. In fact, the downward revision is largely due to cautious companies that reduced inventories in the third quarter. This deliberate drawdown could result in a future pop as demand could exceed inventory levels, triggering a larger re-stocking.

Another positive sign for the economy has been the decline in initial jobless claims. For the week ended Nov. 19, first-time claims for unemployment insurance disappointed relative to consensus expectations, coming in at 393,000 versus expectations of 380,000. However, it is encouraging to see that the number of claims remained below the key 400,000 level for the third straight week. That compares favorably to the job climate during the global recession of 2008-2009, when initial jobless claims peaked well above 600,000. The most recent reading marks only the second period since the crisis unfolded that we’ve seen weekly claims numbers fall below 400,000.
 
Even the Federal Reserve has offered some reasons for gratitude. The Federal Open Market Committee minutes released last week depict a committee that recognizes economic improvement but remains concerned about the slow pace of the recovery, especially with regard to employment. Perhaps most importantly it shows that Fed Chairman Ben Bernanke has the support of the committee—even those members opposed to more stimulus—in terms of maintaining an accommodative stance. That’s a very different and more encouraging scenario than we’re seeing in Congress, which can’t seem to agree on anything but disagreeing these days.

 

 

 

Fatter Profits

But one should look no further than corporate earnings to see the extent of improvement in business conditions in the U.S. Profits, which include those of small businesses, have essentially doubled since the recessionary trough three years ago. In fact, after-tax corporate profits have increased to 10.3% of GDP, according to the Bureau of Economic Analysis. Keep in mind that until 2010, there has never been a quarter in which corporate profits have exceeded 9% of GDP. The health of corporate America should be a reason to rejoice. American households are pulling their weight too. Personal income has made a steady recovery in the past few years, perhaps explaining surprisingly positive sales on Black Friday in the face of still-high unemployment.

While there is plenty to be thankful for, the fact remains that we have some serious issues ahead of us. First and foremost is the drama over the European debt crisis; it appears that the contagion is spreading. Take Germany’s bond auction last week, which was met with tepid demand. The country’s bond yields have actually risen over the past few days, suggesting even Germany is being viewed as carrying some element of risk. There is clearly a great sense of fear and urgency in Europe right now. That anxiety is evident in rumors that the International Monetary Fund is preparing to bail out Italy and the announcement late last week that euro-zone countries are considering a new plan to accelerate the integration of their fiscal union.

Of course, the U.S. also faces significant challenges ahead as it wrestles with a massive budget deficit and a fractured Congress heretofore unable to deal with it. But the point is that even though investors got smoked in 2008, and today there is no shortage of negative headlines to filter through, we have come a long way, baby. And for that, we should be thankful.

 

Kristina Hooper, CFA, CIMA, is head of portfolio strategies at Allianz Global Investors Distributors LLC.

 

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Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Forecasts are inherently limited and should not be relied upon as an indicator of future performance.

A Word About Risk: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. There is no guarantee that dividend-paying stocks will continue to pay a dividend. Treasuries fluctuate in value in response to changes in interest rates, but they are backed by the full faith and credit of the United States as to the timely payment of interest and principal. Lower rated bonds generally involve a greater risk to principal than higher rated bonds. In an environment where interest rates may trend upward, rising rates will negatively impact most bond funds, and fixed income securities held by a fund are likely to decrease in value.

The Standard & Poor’s 500 Composite Index (S&P 500) is an unmanaged index that is generally representative of the U.S. stock market. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials, but including financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE. Gross Domestic Product (GDP) is the value of all final goods and services produced in a specific country. It is the broadest measure of economic activity and the principal indicator of economic performance.

 

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