December 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 25-year veteran of the Investment Management team.



Federal Reserve Monetary Policy

  • At the next Federal Reserve meeting on December 13, we expect the Fed to leave rates unchanged between zero and 0.25%.


  • The year-over-year consumer price index (CPI) released in November shows inflation at 3.5%. We did not anticipate this decline and would add that while the Bureau of Labor Statistics calculated a decline, the actual cost coming out of consumers’ pockets continues to climb.

Economic Activity

  • The only thing “super” about the “Super Committee” was its failure to make any progress on debt reduction. This result did not come as a surprise to many people; the creation of the committee seemed questionable, as it was assigned to do what elected officials as a whole are elected to do in the first place.
  • The Federal Reserve collaborated with 5 other central banks around the world to provide cheaper access to dollar funding for European banks. The rate moved from 1.07% to 0.57% (it is a LIBOR-based floating rate). Then there is talk about using the International Monetary Fund (IMF) to bail out Europe’s needy. The U.S. contributes about 30% of the funds to the IMF as its largest member. Is this another step toward getting the U.S. mixed up in the European debt issue? Is there any consideration for the lack of progress on our own debt problem in the U.S.? Does the U.S. Federal Reserve action suggest that there is more of a Euro problem than we hear about in the media? Our “spider sense” is tingling.
  • December 9, 2011, is the next scheduled summit date in Europe, with the goal of coming up with a solution to the debt problem. In the past, U.S. markets got all lathered up in the excitement for new proposals to solve the problem, only to have the glow wear off when nothing was delivered. Is there any reason this will be different than our “Super Committee”? Perhaps things have become so bad that unpalatable past proposals will now seem like usable solutions. We are skeptical of any solution that does not address excessive spending by the guilty parties.
  • Developed countries are learning that tax collections and debt financing based on projected future growth come unraveled pretty fast when growth does not materialize as expected. It reminds us of a stock market idiom that appears to have direct application to the problem: “A rising market hides a lot of mistakes, and a falling market exposes them.”

Fixed Income

  • The European Central Bank is purchasing bonds in an effort to reduce interest rates for various member countries. Pressure is growing for more. This is similar to the “quantitative easing” the U.S. Federal Reserve is doing. Now the world will end up with even more manipulated markets. It is hard to argue with the growing amount of skepticism about the mechanics of these programs.

Stock Market

  • The stock market continues to be tethered to single data points and news sound bites about Europe, resulting in noticeable ups and downs, even on the same day.
  • While stocks still appear to represent the best value of the major asset classes, volatility makes investors nervous. Some of this nervousness can be alleviated by keeping a longer-term mentality and by owning stocks that have elevated dividends to provide a source of income at or higher than levels on many bonds.
  • The S&P 500 is currently trading at 13.25 times earnings, which is below the long-term average of 15.5. This suggests that the S&P 500 has upside potential if corporate revenues (sales) remain in place, but it is also dependent (both up and down) on the psychology of the market.

View previous Economic Outlook newsletters.

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