This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

Third Quarter Economic and Investment Review

Wondering about your investment performance? This brief article will provide insight into the most important economic events and figures over the past three months.

What a difference a year makes! July, August, and September of 2011 were extremely volatile months for the stock market. Investors feared a default on the nation’s debt due to Congress’ inability to prudently negotiate and raise our debt ceiling. On the contrary, the third quarter of 2012 had a relatively calm and steady march upward for stocks, driven by slowly improving economic data and major stimulus programs by US and European Central Banks. With election season in full swing, attention is shifting toward the course of our nation for the next four years with the two candidates offer strikingly divergent plans for economic growth.

Stock Market Performance

Thanks to a torrid first quarter, the US stock market as measured by the Standard & Poor’s 500 Index ended the first half of the year already up 8.3%.  While a fairly healthy annual return in its own right, the third quarter tacked on another 5.8%. The Dow Jones Industrial Average does not have the benefit of a few exceptionally strong performing companies, notably Apple with a YTD gain of 64.7%.  As a result, this benchmark has risen slightly less to 10.0% through the first three quarters of 2012. An interesting side note: on September 24th, UnitedHealth Group replaced Kraft Foods in the 30-member Dow Jones, the first change to the 116-year-old index since 2009. International stock markets also had a very strong quarter. Developed international stock markets had the benefit of a major bailout from the European Central Bank and rallied 6.1%. The more volatile emerging markets rose an even greater 7.0% as measured by the MSCI Emerging Markets index.

Find out what's happening in West Deptfordwith free, real-time updates from Patch.

US Economy

The US economy continues to muddle along in slow growth mode. Second quarter GDP was revised downward to a 1.3% annualized rate. While data for third quarter growth will not be released for a few weeks, expectations are not very high. Housing data has been a surprising bright spot in recent months, with home prices finally beginning to creep upward. However, the unemployment rate remains stubbornly high. At 7.8%, much of the small decrease we have seen in the past few months has been due to discouraged job seekers leaving the workforce as opposed to robust job creation. Corporations are feeling the pain from this challenging economy, as market bellwether FedEx sees factories
making fewer items and slashed its earnings forecast for the coming year.

Find out what's happening in West Deptfordwith free, real-time updates from Patch.

Decision 2012

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years.” -Alexis de Tocqueville

A quote from the early 1800’s appears to have significant validity present day. As the election approaches, we are set to choose between two candidates who are living out this warning. Democratic incumbent Barack Obama has significantly expanded the size of government without a commensurate increase in revenue, resulting in the largest fiscal deficits in our nation’s history. Republican candidate Mitt Romney promises to slash tax rates across the board without a commensurate decrease in spending. The voters favor the candidate making the best promises while our national debt is ballooning out of control. Regardless of this fact, one of these two men will be our next president, so it is helpful to see a more detailed explanation of their plans for the financial health of our nation.

Barack Obama Mitt Romney Taxes
  • Keep current income tax rates in place for those earning less than $250k, increase taxes to pre-Bush levels for higher earners
  • New 3.8% Medicare tax on
    investment income for households earning more than $250k
  • Permanent 20% cut in income tax rates across the board
  • Eliminate taxes on investment income for households under $200k AGI, maintain current rates for the rest
  • Cut corporate tax rate to 25%
Spending
  • Cut $4 trillion from the deficit
  • Reduce defense spending
  • Maintain Obamacare and
    Medicare programs based on laws passed during first term
  • Goal to bring federal spending down to below 20% of GDP, in-line with historical trends
  • Cut non-security discretionary spending by 5%
  • Repeal Obamacare
  • Decrease federal employee compensation by 30%-40% to align with private sector
Job Creation
  • Aims to eliminate tax breaks for companies that ship jobs overseas
  • Goal to create 1 million new
    manufacturing jobs by 2016
  • Goal to train 2 million workers
  • Cut growth of college tuition in half over next 10 years
  • Aims to bring clarity and predictability to such areas as tax rates, energy policy, labor regulations and trade.
  • Reduce regulations that make the cost of doing business in the US too high.
  • Reduce the size and reach of the government to allow for free market forces

Federal Reserve Stimulus “QE-Forever”

In Goethe’s 1831 drama Faust, a bankrupt emperor is persuaded by the devil to print and spend large quantities of paper money as a quick fix for his country’s financial problems. As a consequence, his nation ultimately unravels and falls into chaos. In an eerily similar fashion to this fictional drama, western governments today have relied upon quantitative easing (money printing) instead of undertaking necessary structural reforms. Basic economic principles of supply and demand teach us that these stimulus programs in which multiple trillions of currency are added to the financial system cause the value of that currency relative to goods and services to decrease. If inflation were to rear its ugly head,
central banks would be forced to reverse course and raise interest rates.  Higher interest rates tend to slow growth and depending on the health of the economy, may tip a nation back into a recession.

On September 13th, the Federal Reserve ignored the risks of future inflation and announced their own stimulus program whereby they will begin purchasing $40bn per month in mortgage securities to keep mortgage rates low. The intention is to fuel an increase in home prices, create extra cash flow for families by reducing mortgage outlays, and encourage more investment through borrowing. This program has been widely criticized, however. Most experts believe that interest rates are already low enough and that tighter lending standards have prevented people from receiving the loans they want as opposed to interest rates being too high.

European Sovereign Debt Crisis

Two and a half years into the European financial crisis, investors are hoping that the latest “bazooka” bailout program will be enough to move the region forward.  On September 6th, the European Central Bank announced a new program to buy unlimited amounts of government bonds. The bailout will also contain a requirement to meet strict fiscal reform conditions. Stocks rallied and yields on ailing government bonds plummeted on the announcement. While this program lowers the interest rate that countries such as Spain and Italy have to pay on their debt, it does little else to address the fact that these countries still face severe economic headwinds and deep fiscal deficits in the years to come. A
September 28 report shows that Spanish banks need around $77bn of extra capitalization to return to health, as a huge decline in the property market created losses on their mortgage holdings. The other large at-risk nation, Italy, is mired in a recession and recently stated that their economy will contract twice as much in 2012 as previously forecast. The ECB’s requirement to enact severe austerity is a tough pill to swallow and is a further headwind to robust growth.

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?