Like the past two years, this year started out with the promise of stronger economic growth only to see the economy begin to sputter as the summer months arrive. After a very strong first quarter for the equity markets, stocks sold off early in the second quarter as evidence of a weaker than expected economy began to emerge, then rallied late in the quarter. As we said in our last letter to you, the stock market was due for a pull back, so we were not been surprised by that. More alarming to us is the fact that the economy can’t sustain any momentum and is affected by several problems that have difficult solutions.
Since the last economic recession ended three years ago, the recovery has been very uneven and inconsistent. Of the twelve recessions we have had since 1940, this recovery has been ninth of the twelve in terms of new jobs created, adding 2.5 million. While all of us yearn for a return of the economic growth of the 1990’s, it is important to remember where we were in 2008 and how far we have come since then. Three years ago we were embroiled in the worst recession since the Great Depression. To expect a complete recovery this quickly is unrealistic. Our economy has been growing in the 2 - 2 1/2% range the past three years and that is expected to continue over the next year. The Fed would like to see that number closer to 3 - 3 1/2%.
There are several obstacles to improved economic growth that must be overcome before we will see any sustainable growth. The situation in Europe is very precarious and seems to be getting worse rather than better. As long as this persists, it will continue to be an anchor to our economy and our markets. The U.S. housing market continues to be a problem, although we are beginning to see some new life in select areas of the country. We, as a country, have too much debt which limits our ability to spend. The average American has total household debt equal to 109% of their annual after tax income. While that is down from 131% in 2007, it is still higher than we see during strong economic expansions.
The 11 1/2 years of this century so far have been very fascinating from an investment viewpoint. We have lived through two terrible bear markets in stocks as well as dizzying stock market rallies, all of which have left us pretty much where we started. The bond market has steadily produced great returns year after year. During the next ten years, we expect stocks to reemerge relative to bonds as the market that produces better returns. Bonds have been on a thirty year bull run since interest rates peaked in 1981. With rates at historical lows, stocks look very inexpensive when compared to bonds.
About Wabash Capital
Wabash Capital is an employee-owned registered investment advisor based in Terre Haute, Indiana, providing investment advice and professional portfolio management to individuals, corporations, banks, trusts, retirement plans and endowments. To learn more about our business, please visit www.wabashcapital.com.