2nd Quarter 2009

After a tough and unsettling fall of 2008, the stock market continues a wild ride in 2009, although the second quarter ended on a much more positive note. The Dow Jones Industrial Average, after hitting a dark moment in March, recovered 28% off the lows to end the six month period at a 4% loss year to date. The broader Standard and Poor’s 500 index took a similar route and recovered 36% off the lows in March to end the six month period at a 2% gain.

I am pleased to report that most of my managed accounts did significantly better than the market.

After breathing a collective sigh of relief, the question on most peoples’ mind is - where are we going from here? There is no question that our economy faces significant burdens moving forward, but the immediate crisis has subsided. Some of the leading economic indicators have strengthened recently. There are some signs that the pain of the recession is beginning to subside. However, not many forecasts predict much of a recovery in 2009, and most point down the road to 2010 or even 2011.

Our economy still has significant hurdles to overcome, and the best we can say right now is that things are beginning to look a little less bad. Unemployment is a major hurdle to consumer spending and stands at a staggering 9.5%. One in ten people who desire to work can’t find a job. When I interact with my clients and friends, I am extremely thankful that we live in the Midwest where the economic impact is muted.

The immediate banking crisis has passed, but banks are now using higher standards in lending practices, which makes borrowing money more difficult. Consumers have returned to the old fashioned and outdated practice of actually saving money. If this continues, this will be a powerful long term positive impact, albeit a difficult factor in allowing the economy to recover in the short term. I continue to jump on my lifelong soapbox of living a debt free lifestyle (including your home by retirement), so I have some encouragement with this trend.

Proponents of the government’s spending practices point out that these actions were necessary to save our economy from falling to the point of no return. I do believe some government action was required, and I was in favor of the first stimulus action. However, the concept of spending is running too far. I’m not convinced that the long term consequences are justified vs. the perceived crisis of faith in our system. Never-the-less, the huge government debt will have long term consequences: taxes, inflation, and higher borrowing costs for everyone, to name a few. These will be a major drain on our economy’s ability for years to come.

In the short term, deflation was actually at 1% recently, and the prospect of hyper-inflation seems to be more of a futuristic concern. Our economy is still operating at an inefficient level, with excess production capacity and slack demand in the labor markets. We need to build some inflation hedges into our portfolios, but this can be done incrementally over time.

My recommended investment and planning themes for the upcoming several years are as follows:

1. Focus on income producing assets. Blue Chip Dividend paying stocks have yields around 3% (plus any capital growth from a long term hold in a recovery). Mid term bond funds have yields of 5-6%. High yielding preferred securities are yielding 10-15%. Diversification is extremely important.
2. The US economy is facing slower growth under the drag of massive government debt and higher taxes. The economies of Brazil, India and China have a much greater likelihood of experiencing superior growth. I have moved my recommended international allocation up to 30% from 20% in an all stock portfolio. For a few aggressive accounts I would even consider 40%.
3. There is always a chance that the stock market could fall 15% to 20%. But the down-side pressure has greatly subsided and the greater likelihood is a moderate positive environment. The upside potential far out-weighs the down-side in the long term.
4. The greatest success factor in any retirement plan is to live a modest lifestyle that falls within your portfolio’s ability to produce income under a conservative projection. Live debt free, save money, use insurance to protect against disasters, and seek contentment in the simple aspects of life. Please don’t take your cues from the recently deceased Michael Jackson. J

Investing will not return to the same old rules and we are now operating under a “new normal”. We can anticipate:

1. Slower growth in our economy due to higher governmental debt which will lead to higher taxes and inflation.

2. More political influence in our day to day lives.

3. Emerging economies growth will exceed that of the United States.

4. Currently, we are experiencing deflation and in the long term we will have higher inflation than typical.

5. The US dollar is at risk of further declines and at risk to being used as the world’s currency.

6. Less leverage and debt by both consumers and businesses.

I do not welcome these changes, but I do believe we can map a strategy to live a successful retirement within these parameters.

Ron Dickinson, CPA, CFP^®, MPA-tax