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Bobby Lumpkin

Capital Investment Services

12/30/11


Market Conditions

As you know, volatility continues to be a dominating factor in the financial markets.  There have been three dark clouds hanging over the stock markets in the last couple months.  Whether it is US debt issues, the fear of revisiting a recession or the instability in Europe, each of these has taken a toll on overall investor confidence.  It is important to note that we will continue to face some headwinds as we go into 2012; however, the economy is not falling off a cliff but rather running in place.

A large uncertainty right now is the fiscal policy of the United States.  As an example, the cut in payroll taxes for 2011 expires at the end of this year.  The President has proposed a package to extend and expand this payroll tax cut, however, the proposal seems to be dying on Capitol Hill.  This leaves us with a key uncertainty in the consumer outlook for 2012.  Another point of uncertainty that impacts the consumer is gasoline prices which have been volatile as well.

There are several positive points to focus on in this recovering economy.  First of all, receding fears of a near term recession have been confirmed with recent economic data.  Corporate profit which is a key driver of capital spending has remained strong.  This point suggests that fixed business investments as well as mergers and acquisitions will continue to expand in 2012.  Lastly, there are definitive measures being taken by European leaders to do something concrete to address the financial crisis in Europe.  Amid the volatility, these positives have brought resiliency to the markets boosting equities and sending bond yields higher.

Economic Outlook

(4Q11): +1.0% to +2.0% GDP growth. Employment: Private sector growth in payrolls has been moderate, but below potential.  Government jobs continue to fall.  Job destruction is low, but new hiring is limited.  Consumers: Gasoline prices, a major factor in slowing consumer spending growth in the first half of the year, have declined, providing some relief for the consumer heading toward 2012.  Manufacturing: Activity is more mixed across industries, but generally moderate.  Inventories are lean and likely to rise roughly in line with the pace of sales over time.  Housing/Construction: Sales and residential construction appear to be “bouncing around a bottom”.  Mortgage rates are at record lows, but we really need to see much better job growth to have a full recovery in housing.  Prices: Higher food and energy prices have boosted headline consumer price inflation to pass higher costs along, but it’s unclear whether these will stick.  There’s little pressure in labor costs and inflation expectations remain contained.  Interest Rates: The Fed will keep the overnight lending rate near zero for through the middle of 2013 (conditional on “low rates of resource utilization and a subdued outlook for inflation over the medium run”). The Fed’s maturity extension program should keep long term interest rates low for a long time.
*Economic Outlook – Scott J. Brown Ph.D. Chief Economist, Raymond James & Associates.

Investing in dividends can aid in total portfolio return

Investors in this market know all too well the volatility that we have experienced.  In an effort to enhance the total return of a portfolio, an investor may consider dividend paying stocks.  Dividends can also be found in other investments.  Standard and Poor’s, for example, reported that dividends accounted for one third of the monthly total return of the S&P500 from 1926 to 2010.  Capital appreciation accounted for the rest, making a case that both sustainable dividend income and growth potential are essential to total returns.

Dividend reinvestment works very effectively as a way to drip into the market and it allows the power of compounding to work in your portfolio.  Since dividends take time to grow, it may take several years before the true benefits of dividends become evident.  It is important to note that patience can eventually payoff with a dividend strategy.

According to Jeremy Siegel’s, “The Future For Investors”, dividends have been the overwhelming source of stockholder return throughout time, and firms that have higher dividend yields have given better returns to investors.  Dividends can cushion market corrections by offsetting price depreciation or offer additional positive return when capital appreciation options are limited by a slow growth environment.  Companies with consistent dividends historically have been more cautious and tend to be less volatile.  These companies often generate strong cash flow.  They also tend to be mature, therefore doing a good job of both managing risk and return.

So what’s my take…

Volatility has been the common theme in the markets over the past 4 months.  This volatility has shaken investor confidence and the overall market sentiment is rattled.  The uncertainties in the European financial crises, US Debt legislation, and a stagnant economy have put pressure on the broad markets.  Our current focus is on managing the overall portfolio to the current market dynamics which drives us to seek a “total return” strategy coupled with our “balanced portfolio model”.   Over the next two months, we will continue to engage the market in an effort to refine each portfolio seeking a return profile more closely aligned with a “total return” strategy.  There will be intermittent opportunities to engage growth positions seeking capital appreciation and we will take action where appropriate.

My confidence in the current portfolio strategies remains solid as we have monitored them through this extended period of volatility.  This does not mean that the portfolios have not taken downward pressure in market value but in relation to the broad market performance, the strategies have held consistent with my expectations.  It is important to note that these are uncertain times in a broad economic recovery that has lead to an extended period of volatility.  In these situations, we have to be consistent in our portfolio strategy and flexible to address individual investment positions that may perform unfavorably.

Wisdom occurs at the intersection of knowledge and experience.  My team will continue to use the knowledge that we gain through research and our vast experience with the markets to make wise portfolio decisions for you.  Our goal remains to be focused around managing and preserving your wealth.

Once again, the strategic advice above falls right in line with common sense.  Our Common Sense Approach to Portfolio Management includes the discernment to “stay the course”, the resiliency to “navigate around choppy waters” and the drive to “take action when needed”.

Capital Investment Services' services are offered through Raymond James Financial Services, Inc. Member FINRA/SIPC

This information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Bobby Lumpkin and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. There is no assurance any of trends mentioned will continue in the future. Investing involves risk and investors may incur a profit or a loss, including the loss of all principal. Dividends are not guaranteed and must be authorized by the company’s board of directors. The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.s. stock market. Investors can’t directly invest in an index.

About the Author:

Bobby Lumpkin

 

With a total of 18 years experience in business and finance, Bobby specializes in overall financial planning and developing investment strategies for businesses and individuals.

 

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