In 2012, Hewins Financial Advisors’ president Roger Hewins took a look at big picture issues in the financial industry and world markets for Hewins Financial clients. Roger explored historical trends, addressed widespread speculation, and reminded investors that markets fluctuate and to not sweat the small stuff.
Just a reminder: Our philosophy is one of respect for all of our clients and colleagues and fellow professionals.
Our purpose is to try to contribute something useful to your understanding of what is happening right now and long term, in support of maintaining a disciplined approach to investing in the face of myriad fears and distractions.
With that said, let’s dive into Roger’s comments and see how they panned out as we enter 2013.
The Glass Half Full – Labor Markets
In Roger’s first two letters he addressed the effect the figures from the Bureau of Labor Statistics have had on the markets, and the potential effect it could have had in the recent elections. It was noted that while most attention is given to the unemployment rate, other statistics can be just as indicative of our current labor and economic situation. Here is a recap and update since the March reports:
- The unemployment rate has dropped from 8.2 to 7.7%.1
- The labor force participation rate is at 63.6%.2
- The employment-population ratio rose from 58.5 to 58.7%.3
- Long-term unemployment dipped from 5308 to 4786 (The lowest since June 2009, but far higher than numbers seen between 2002 and 2008.)4
Roger had indicated that the election may turn on the labor statistics. In September, job growth became a major point of contention in the presidential and congressional races, with unemployment dipping to the levels of President Obama’s first months in office.
Across the pond, Roger then discussed the labor troubles in Spain. A quick recap:
- The unemployment rate has risen from 20 to 26.2% (higher than Greece).5
- Youth unemployment has risen from 50 to 54.2% (its highest rate).6
The Fiscal Cliff and Emerging Markets
At the end of the second quarter, Roger began to delve into the looming “Fiscal Cliff” and attempted to ease the concerns of long-term investors in a down economy. As predicted, with a Republican majority in the House and with the reelection of President Obama and a Democratic Senate, a stalemate regarding spending cuts and tax-code reform has ensued. This has led to much uncertainty in the labor market, as can be noted by the stagnant labor force participation numbers from just above.
However, Roger also noted that buying when people are fearful, and prices are relatively low, often works out rather well in the long run. In July, the markets had remained relatively cheap even as corporate earnings rose. Since July the forward-looking P/E ratio has gone up from 12.4 to 12.9 in the US and from 10.5 to 10.9 in Europe, Australia, Far East (EAFE).7 The markets have now become more expensive—hopefully a sign of long-term optimism.
Roger finished with his discussion on the growth of emerging markets. Since July, the US has seen its weight in the world’s capital markets drop from 48 to 47%, and the forward-looking P/E ratio of emerging markets rise from 9.6 to 10.3.8 With most emerging markets experiencing GDP growth and low unemployment, the future looks very intriguing abroad.
The Perspective of the Investor
Roger’s latest letter went full circle to explore how all of these industry and global issues affect the investor. As he explained throughout the series of letters, a down economy does not mean opportunities do not exist in the market. As well, he reminded speculators that because the market anticipates, you may miss a great opportunity if you sit out. He notes that even during times of negative reports concerning the market, we climbed the “wall of worry” with the S&P now just over 1,440 from 1,150 one year ago. In comparison to the equity market, 10-year treasury yield continues to be close to historically low rates at 1.72%.9
The most recent projections from the Federal Open Market Committee have upgraded their projections for the next year, seeing a bigger increase in real GDP growth and a lowering unemployment rate.10 Globally, The Organization for Economic Co-operation and Development (OECD) sees the economy growing by 2.9 percent (down from a projection of 3.4 percent earlier this year).11
As we await the conclusion of the fiscal cliff drama—one way or another—come January 1, 2013, we hope some of this information will be helpful to you in thinking about your long-term financial plan and in talking to your financial advisor about it. Happy New Year!