January 22, 2013

Are We Headed For a Bull Market?

Investors appeared to be as optimistic as a newly-engaged couple last week. Strong housing data, a positive labor report, temporary easing of debt ceiling pressures, and some stronger-than-expected earnings results helped the Standard & Poor's 500 and the Dow Jones Industrials indices close at five-year highs.

Commerce Department data showed housing starts climbed by 12.1 percent in December, on an annualized basis, exceeding economists' expectations. Home construction is expected to continue to rebound, as long as mortgage rates remain low, and experts anticipate sales of new and existing homes will show improvement this week. This continued improvement in the housing market may have contributed to a more positive investor outlook.

The possibility of a debt ceiling compromise also encouraged markets higher. Unlike down-to-the-wire fiscal cliff negotiations, which caused investors to hold back at the end of 2012, discussions of temporary debt ceiling extensions by House Republicans soothed investors' concerns.

Several companies, including several high-profile Wall Street banks, reported strong results last week, and several companies reported earnings that beat lowered expectations. This helped drive bank, transportation, and housing indices to historic or multi-year highs. Since the Transportation sector includes many highly cyclical and economically sensitive stocks, which tend to underperform when investors anticipate recession, this was seen as positive news for the economy.

According to Barron's, a secular bull market begins when both transportation companies and the Dow Jones Industrial Average hit new highs. The Dow Jones Transportation Average reached a new high last week, but the Industrials index remains 4 percent below its highest close which was reached back in October 2007. Are we headed for a bull market? Only time will tell.

Data as of 1/18/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.9%	4.2%	13.6%	9.0%	2.3%	5.3%
10-year Treasury Note (Yield Only)	1.8	N/A	1.9	3.7	3.7	4.0
Gold (per ounce)	1.9	-0.3	2.5	14.2	13.9	16.8
DJ-UBS Commodity Index	2.1	1.7	0.2	0.7	-5.5	2.0
DJ Equity All REIT TR Index	1.2	3.6	20.7	18.6	8.9	12.6

WHAT'S THE DIFFERENCE BETWEEN AMERICA'S DEFICIT and its debt, and how do they relate to the debt ceiling? The terms deficit, and debt ceiling are likely to be bandied about by politicians and the media frequently in coming months. It's important for all Americans to understand these terms.

The deficit

America's deficit is its annual budget shortfall. Any year the government's spending exceeds its revenue (the amount of money taken in through taxes and other means), it has a deficit. When the government spends less than it takes in, it is called a surplus. Deficits are controversial and have been for many years. Keynesian economics states deficits can be used to stimulate economies and help countries rise out of recession. Other experts argue governments should not incur deficits because the money paid in interest could be better spent elsewhere.

The debt

The national debt is the full amount the American government owes - all of its deficits and surpluses added together. If the government runs at a deficit of $10 million for five years, then its debt will be $50 million. Every year that a country runs at a deficit, its debt increases.

The debt ceiling

When a government runs at a deficit, it must borrow money to keep operating. The U.S. government generally borrows by selling securities such as Treasury bills, notes, bonds, and savings bonds. The amount it can borrow this way is limited by the debt ceiling, which was established under the Second Liberty Bond Act of 1917.

The United States hit its current debt ceiling, which is about $16.4 trillion, on December 31, 2012. Before it can issue additional debt, Congress will need to raise the debt ceiling. This may make the debt ceiling a popular topic in political conversation during the next few months!

Weekly Focus - Think About It...

Compromise: n. Such an adjustment of conflicting interests as gives each adversary the satisfaction of thinking he has got what he ought not to have, and is deprived of nothing except what was justly his due.

-- Ambrose Bierce, American journalist

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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