2013 First Quarter Economic Update and the Fed

Spring is here and with it comes a look back on the dreary winter months and hopes of better weather and new growth.

Europe was back in the news this quarter with its usual dramatic flair. A $13 billion crisis in the economy of the small island of Cyprus led to a poorly designed bailout plan that entailed a 6-9% tax on federally insured bank deposits in Cyprus. To understand Cyprus better, it has a Gross Domestic Product (GDP) of $24.7 billion, compared to the $25.9 billion GDP of Vermont. (GDP is the broadest measure of the overall size and strength of an economy.) However, the Cypriot banking system is 835% of the country’s GDP compared to the US banking system, which is only 8% of our GDP. It was certainly a disaster in the making. After long lines at banks and empty ATM machines, the EU luckily backed away from this deal a few days later.

This and our recent economic crisis harkens one back to the Panic of 1907 when there was a mass run on bank deposits at several large banks. Millions of dollars were withdrawn and banks closed their doors, leaving J.P. Morgan to orchestrate deals to bring confidence and liquidity back to the financial market. Throngs of people filled Wall Street demanding their bank deposits and his associates could be seen carrying bags of cash and gold down the streets to deposit in banks in order to quell the panic. This panic eventually led to the development of the Federal Reserve System.

Speaking of the Federal Reserve, Bernanke had much to say this quarter. The Fed is maintaining its near zero percent interest rate policy and will continue its purchase of large sums of mortgage-backed securities, buying bonds faster than the US can print them. It predicts that in 2013, unemployment will lower to 7.3-7.5% and GDP growth will be 2.3-2.8%. The Fed recognizes the improvement the economy has made but is looking for sustained improvement before making changes to its policies.

The stock market has made a strong recovery since its low point in early 2009. Despite fears this quarter concerning the fiscal cliff and subsequent compromise, the economy continued to grow stronger than expected. Household net worth has increased. American housing has come back to life and one likely sees more for sale signs and construction crews in their neighborhood. The DOW and S&P indices touched new highs this quarter and this growth is domestic driven. American investors are clearly focused on the US economy, largely ignoring European and other external issues. There seems to be plenty of room for economic growth, which could then provide hope for continued stock market increases.

Please find enclosed your 4th Quarterly Portfolio Report for 2013.  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®