The risk of an imminent fiscal crisis was averted when lawmakers agreed on some $600 billion in spending cuts and tax increases in January. This doesn’t mean we are out of the woods quite yet. We still have to address the long-term U.S. debt problem and the thorny issue of entitlement reform. However, the progress made to date on Capitol Hill has helped lift consumer sentiment and rekindle investor optimism. Accordingly, January was a good month for stocks, with funds continuing to flow from money markets into equities. Although continued flurries of concern over sequestered spending – a law that requires lawmakers to agree on some $85 billion in spending cuts over the next six months – might cause turbulence in the markets, many investment pros are feeling somewhat bullish.
Here’s an overview of recent market observations:
- The economy continues to grow at a modest pace – a pace that doesn’t significantly affect unemployment rates – but growth nevertheless. Concerns over government spending and the long-term debt problem will continue to hobble growth, creating an estimated 1 percent to 1.5 percent drag on gross domestic product growth for 2013;
- GDP figures for the fourth quarter of 2012 and for the first quarter of 2013 may be revised upward, providing further fuel for investor optimism;
- Housing inventories are low (below 2001 levels, according to the Federal Reserve Office in St. Louis), which suggests the possibility of an increase in home building – all of which could spur spending on consumer durables;
- Interest rates and inflation are expected to remain low – despite public speculation that the Federal Reserve might increase rates sooner than originally promised. The release and interpretation of the January minutes of the Federal Open Market Committee had created some speculation about how long the central bank would continue on its current bond-buying program;
- Auto sales are beginning to spring to life. A spring surge of car shopping would help boost GDP as we move into the summer months;
- Some analysts are looking with hope for the S&P 500 to hit 1,600 this year – though most hedge their bets by conceding that there might be deterrents to such optimism;
- Undoubtedly, the economy is sending mixed signals. The more pessimistic analysts worry about the effect of higher taxes and increased gas prices on consumer spending; and
- On the manufacturing front, U.S. companies face challenges from shrinking, recession-whipped markets in Europe and from cautious investors stateside.
It should also be noted that some of the consumer spending data for early 2013 might be a little skewed because many corporations accelerated bonus and dividend payments in December 2012 to avoid possible tax hikes in the New Year. Accordingly, some individual incomes surged at year-end, only to decline in January when taxpayers also saw tax hikes. Those who didn’t benefit from December bonuses got no extra spending money in December and probably also saw less in their paychecks in January.
Please note that this commentary is general in nature and is not intended to replace expert advice from your tax and investment professionals.