December 2012 Economic Outlook
This is a monthly newsletter by Greg Sweeney, CFA, Chief Investment Officer, at Bell State Bank & Trust. Sweeney holds a bachelor’s degree in business from the University of North Dakota, is a CFA charter holder, and is a 26-year veteran of the Investment Management team.
Federal Reserve Monetary Policy
- At the next Federal Reserve meeting on December 12, we expect the Fed to leave rates unchanged between zero and 0.25%. The Fed updated its target, indicating rates would remain near these lows until 2015.
- The year-over-year consumer price index (CPI) released in November shows inflation at 2.2%. The release this month may turn out to be flat as the Bureau of Labor Statistics continues their massive cover-up on the actual cost of living in the CPI report citing decreasing gasoline prices.
- What if we told you that U.S. federal tax collections were at record highs for the fiscal year that ended September 30, 2012? It is true, federal taxes collected were at an all time high in 2012 reaching $3.087 trillion. This is hard to believe, given all the media coverage about taxes and the “fiscal cliff.”
- So what’s the problem? In a word, spending.
- The U.S. went over the “fiscal cliff” in 2009 when annual government spending, which had been hovering in the $3 trillion range, jumped to a whopping $4.58 trillion and has remained in that range!
- This spending has driven the United States to deficits of more than a trillion dollars annually ever since.
- The debate on the current situation is about getting out of the “fiscal abyss,” not going over a cliff.
- Look at the deficit chart below and see if you agree that the “fiscal cliff” was in 2009.
- Money continues to go into fixed income investments in spite of limited or negative real returns on bonds. Perhaps it is the result of changing demographics, with baby boomers looking for more stability in their portfolios. Perhaps it is protection from an uncertain economy. Whatever the reason, money going into fixed income at record low yields is exposed to potential volatility that many investors are not aware of.
- Investors are frustrated that the market is not reacting more negatively to current economic and political events. The prospect of rising capital gains and dividend taxes put some pressure on the market, but that appears to have subsided for now. There is still a significant amount of monetary stimulus that affects the market. Assigning culpability to all of the market influences right now is an exercise in quantum physics.
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