2012 Third Quarter Economic Update and US Elections

Happy Autumn! The leaves are already turning beautiful shades of red, yellow and orange and as I look back on the summer, I think how quickly time passes. For the markets, it was sunny skies as stocks rallied in the third quarter, posting impressive returns. The S&P 500 was up 6.4%, resulting in a year-to-date return of 16.4%. International markets enjoyed similar returns, although nine nations in the Eurozone are in a recession.  There was a rather bold third round of quantitative easing, as the Fed committed to purchasing $40 billion per month of mortgage-backed securities to keep interest rates low and help boost the economy, with no seeming end in sight. A major positive economic sign this summer was the improvement in home prices, which will increase output and confidence. This should lead to more hiring, further increasing confidence in the economy. Investors received a reprieve from market volatility during the third quarter. However, this may be short-lived during the fall as the world returns from vacation with a closer eye on world markets and economies, the European Central Bank faces obstacles in the implementation of its plan to save the Eurozone and the upcoming United States elections.

The elections in the United States will be front and center this quarter. Both parties seem to be engaged in an artificial debate about so-called hot points, but seem afraid to address the real hot points of entitlements, tax code reform and offering a credible way to stop borrowing money to pay for what each party wants. The Democratic budget plan seems long on details, can’t pass Congress and doesn’t attempt to unwind spending. The Republican budget plan is short on details, still can’t pass Congress and attempts to magically unwind spending. Under both plans, the government will contribute to the deficit with spending each party feels is necessary in order to borrow the nation’s way to prosperity.

I am not writing this quarterly letter with a political agenda, but as a financial planner, it is difficult to forget it is roughly one year ago that the United States lost its long-coveted AAA debt rating due to Congressional dysfunction. I am equally frustrated with both parties as I watch Washington continue to not understand the drag their indecision puts on the economy. No decisions will be made until after the elections. Corporations are in lockdown mode and not making decisions due to the uncertainty.

Politicians are publicly worried about the “fiscal cliff”, when tax cuts will lapse and automatic spending cuts will take place, resulting in economic turmoil. However, this is certainly not news to anyone in Congress or the White House. Our current financial problems can be blamed on a multitude of events, including wars in Iraq and Afghanistan, reduced revenue from the dot-com bust, the Great Recession and Obama’s lavish stimulus spending. It stems from large Bush era tax cuts in 2001 and 2003, though. These cuts would have created unsustainable deficits after 10 years, as projected by the Congressional Budget Office. In order to enact the tax cuts, they were designed to officially expire in ten years, but unofficially, the cuts were never intended to expire. These tax cuts have become a subsidy and to take them away would create a period of painful readjustment, which no politician wants to be responsible for. After the elections, I believe both sides of the table will be forced to compromise, thereby avoiding a recession, but likely will not address our nation’s real problems. The next month should be very interesting.

Please find enclosed your 3rd Quarterly Portfolio Report for 2012.  If you have any questions or concerns, please call me at 518-867-4245 or email me at olivia@mussettwealth.com.

Warm regards,

Olivia A. Mussett, CFP®