Quarterly Newsletter - October 2015
- Our Economy (Part 1)
- Market Commentary -October 2015
- Cultural Performance - October 2015
- Investment Performance - October 2015
- Research Summary - October 2015
Our Economy and Its Key Components - Part 1
David Lee Smith
In a world where adjectives like topsy-turvy and even chaotic, provide apt descriptions of our current state of economic affairs, it's become especially difficult to accurately define the U.S. economy's overall direction. Ask a dozen economists whether the financial influences in our nation appear to be slowly advancing in a tepid recovery or retreating toward yet another recessionary spell, and you'll likely receive a variety of contradictory responses.
Part of the difficulty lies in actually defining what we mean by "the economy." Does the term refer to the vitality of our gross domestic product, to relative unemployment levels, or to the overall direction being exhibited by the securities markets? In reality, it points to all these trends and many more. Now, however, as we move toward our next quadrennial election, it's crucial that we keep abreast of a host of indicators subsumed by the world of economics. And, it's also vital that we remain attentive to whatever thoughts on the economy are uttered by the plethora of presidential candidates still on the scene.
It seems that the optimum way to prepare ourselves for such tasks involves taking a gander at perhaps ten key aspects of our domestic economy and to attempt to discern what each means to the whole. And while we'll strive for simplicity in what could easily become excessive complexity, we'll spread our task among three separate articles, thereby affording our readers with time to consider and better comprehend each of these components.
Led by The Fed
Let's begin with a glimpse at the U.S. Federal Reserve System. After all, what's typically referred to as "the Fed" has effectively dominated the economic scene during at least the past seven years. At the risk of excessive simplicity, this central banking system of the United States controls our nation's interest rates, among other things, thereby stimulating or applying brakes to many parts of the economy. Beyond that, it serves as the lender of last resort. In that role, which it has had to play several times through the years, it provides financial liquidity in emergency situations.
Since 2008, the Fed has conducted a trio of quantitative easing (QE) programs designed to strengthen a wobbly U.S. economy. Those programs have involved its buying U.S. financial assets from commercial banks and other institutions, thus raising the prices of those assets and lowering their yield. One result has been a reduction of interest rates in general. Further, the programs have included steady increases by the Fed in the money supply.
The first such easing began in November 2008, while the second iteration was kicked off precisely two years later. The third program began in September 2013. However, with the Fed's assets having reached $4.3 trillion by October 2014, further purchases were brought to a halt at that time.
Amid rapt attention and a passel of predictions as to whether or not the Fed would reverse course and move to raise rates at its meeting on September 17, 2015, its Board of Governors agreed to defer such an action for at least another month. The avowed reason was the recent spate of global economic softness and its dampening effect on inflation in the U.S.
With two more 2015 meetings scheduled for late October and mid-December, there appears to be at least the possibility that a nudge to the north for rates could occur prior to the start of 2016. In any event, it's been impossible for several decades now to remain up-to-speed on the economy and the various markets without paying close attention to the actions being taken by the central bank. On that basis alone, both the Fed and overall interest rate movements merit our attention.
Another Day Older and Deeper In Debt
Moving to another aspect of our economy, most Americans realize that our national debt -- technically the value of outstanding Treasury securities at any time -- has figuratively risen to nosebleed heights during the past several years. Indeed, now moving toward $19 trillion, it's twice its level when the current administration took office in January 2009. Obviously, the higher the debt goes, the more burdensome it will ultimately be to today's younger generations. It's also worth noting that fully 47% of the current debt load is held by foreign investors, led by China and Japan.
One way to gain a true perspective on the relative weight of the national debt is to calculate its ratio to the nation's GDP at any given time. For instance, by 1945, the final year of World War II, necessary war-related costs had driven that ratio to an all-time high of 115% of our GDP. It then subsided for several decades, with the level in 2000 at 34.7%, followed by 40.5% in 2008. By June 2015, with government spending having shot through the proverbial roof, the ratio had reached a dauntingly-high 102% of the previous 12 months' GDP.
Entitlements: the biggest hole in our budget
Looking at yet another economic element, one closely tied to our debt levels, let's consider the areas that account for the largest amount of our nation's federal spending: entitlements.
According to the Heritage Foundation, fully 60% -- some would say more -- of U.S. government expenditures in 2014 went to Social Security (24%); Medicare, Medicaid, and additional healthcare programs (25%); and other welfare and entitlement programs, including food stamps and unemployment payments (11%).
Historically, in 1972 the totality of our various welfare programs cost the U.S. citizenry about $500 billion. Had that spending grown at approximately the same pace as GDP through the years, it likely would have expanded to about $1.5 trillion by now. Instead it's risen to essentially twice that amount, or north of $3 trillion. It should be clear that entitlement reform must be on the docket of the next administration. That's especially the case given the probability of interest rate increases once the Fed backs off its quantitative easing. However, given the steady increases in healthcare costs, success in that endeavor could prove elusive.
MARKET COMMENTARY - October 2015
George Parks, CFP - Chief Investment Officer
The Fourth Quarter and Beyond: Send in the Clowns
The markets appear to be taking something of a brief pause, following the third quarter's almost daily -- frequently triple-digit -- roller coaster rides.
Clearly the key impetus for the last quarter's nearly unprecedented volatility included rapt attention to the Federal Reserve and its apparent plans for the nation's interest rates, along with fears that the recently robust Chinese economy may be beginning to sputter like a neglected 1978 Ford pickup. Regarding our Asian friends, we can only wait for definitive information on the nation's true economic status. Official numbers emanating from Beijing continue to indicate a GDP growth rate in the vicinity of 7%. There are, however, more than a few observers outside the nation who proclaim that a number of factors in the big country "feel" more like, say, 4%-ish upward movement.
Dizziness Among Fed followers
As to the Fed, you know by now that its leaders took a pass in September on raising rates. That, after seven years (next month) of substantial intervention in the economy -- and especially the markets -- through a trio of quantitative easing measures. The central bank will have two more shots at reversing its course before the conclusion of 2015, one later this month and another in December. In the meantime, it seems more and more appropriate that the markets, like so many young colts, be allowed to try at least breaking into a trot on their own.
However, it appears likely that Dr. Yellin and her colleagues are awaiting more definitive inflation indicators than have become apparent thus far. Sure, several commodity prices have inched higher of late, with the obvious exception of oil. And while wages have similarly ooched slightly higher, working folks continue to have a perhaps interminable trek ahead before they find themselves in tall cotton. It's therefore best for market observers to remain cognizant that consumer spending continues to account for more than two-thirds of U.S. GDP.
A Quick Look Back
From an historic perspective, it may be because October is annually polished off with concerted attention to ghosts and goblins that the month is typically far from glowing for the markets. Conversely, the third year of a presidential term more often than not tends to sally forth with positive results. But that's rearview mirror investing, and it's highly unlikely that there have been many prior presidential years (first through fourth) that have been as chaotic as the world in which we now find ourselves. Indeed, even with a lights-out fourth quarter, market results for the entirety of 2015 are almost certain to be negative year-over-year.
In a related area, and closer to home, American Values Investments' CEO Carter LeCraw has noted, apparently with more than a little sagacity, that,
Investment performance is not our main goal. Nevertheless, we believe financial rewards often result for companies whose management teams pursue a values-driven approach to business. Therefore, if we maintain our "values first" approach to stock selection, we feel we have a reasonable opportunity for satisfactory financial results.
Since the proverbial proof of the pudding is in the eating, it's worth noting that, with the overall market having met the correction standard of a 10% decline, the firm's American Hero models have posted positive trends relative to the major indexes for the year.
Hear Ye, Hear Ye, Step Right Up
Now, as we attempt to peer into 2016, the picture becomes even foggier than has been the case this year. For starters, we don't yet have a solid inkling of the Fed's posture as we enter the new year. Beyond that, the geopolitical scene continues to become more dicey, seemingly by the week. And last, but hardly least, the quadrennial election will surely gain in importance for the financial markets as the next year progresses.
Already we have tax proposal blandishments ranging from Rand Paul's 14%+ flat tax to Bernie Sanders' notion of a 90% top marginal rate. With a spread like that, and obviously more to come, investors surely will find circus attendance redundant in the coming year.
CULTURAL PERFORMANCE - Third Quarter 2015
This section report on the "cultural" performance of American Companies. It highlights specific ways, during the quarter, these companies have performed in helping America become a better and brighter "City upon a hill".
- Rackspace Hosting (RAX) employees donated more than $12,000 to purchase backpacks for 2,000 students in need across all US Rackspace locations. They then held a Back to School Fair where they distributed the backpacks filled with school supplies to children.
- Patterson Companies (PDCO) awarded a $25,000 grant to KSDS Assistance Dogs, Inc., toward renovating and expanding onsite facilities for KSDS students to train with a canine partner. KSDS professionally trains and places guide dogs to provide mobility assistance for individuals who are blind or visually impaired; service dogs to assist people with disabilities; and facility dogs to work alongside professionals such as teachers, counselors or social workers who have a need for a dog in their occupation.
- Tractor Supply (TSCO) is the Title Sponsor of a new multi-purpose equestrian facility currently under construction at the Park at Harlinsdale Farm in Franklin, Tennessee, which opened in September 2015. Tractor Supply has made a five-year sponsorship commitment to Friends of Franklin Parks, which will enable the non-profit organization to introduce more people in the area to a variety of equestrian experiences through this new facility. In addition to horse competitions, riding lessons and arena polo matches, Friends of Franklin Parks plans to use the Tractor Supply Co. Arena to implement educational partnerships with schools and work-to-ride programs that ensure every child has an opportunity to learn to ride.
- Mead Johnson Nutrition (MJN) donated $100,000 to the Evansville Parks Foundation for the construction of new play spaces in some of the city's neediest neighborhoods. The grant is funding new toddler playgrounds at four Evansville-area parks, none of which currently have age-appropriate equipment for young children. The improved play spaces will include equipment specially designed to enhance the overall health, well-being and development of children in the community.
- Grand Canyon Education's (LOPE) Grand Canyon University held its second Ministry Forum hosted by the its College of Theology. The event focused on the question of whether to baptize babies (paedobaptism) or wait until they're old enough to understand the sacrament (credobaptism). The hourlong program included presentations by GCU faculty members John Frederick, an Evangelical Anglican priest, and Dr. David Farbishel, a Presbyterian minister, who believe in paedobaptism. The practice places no restrictions on whether the infants or young children of believing parents should be baptized. Representing the credobaptist (and the Baptist religion's) point of view were faculty member Numa Gomez andJosh Vincent, senior pastor at Trinity Bible Church in west Phoenix. Credobaptism holds that a person should be baptized on the basis of his or her profession of faith in Jesus.
INVESTMENT PERFORMANCE as of September 30, 2015
Although investment performance is not our primary goal we believe financial rewards often result for companies whose management teams pursue a values-driven approach to business. Therefore, if we maintain our "values first" approach to stock selection we feel we have a reasonable opportunity for satisfactory long-term financial results.
- Carter LeCraw, CEO
|9/30/2015||1yr||3yrs (annual)||5yrs (annual)||10yrs (annual)||Since inception 12/31/09 (simple)|
|Americans Hero Equity||+4.58||+8.54||+10.58||+6.51||N/A|
|American Hero Index||-0..63||+9.28||+11.51||N/A||+86.12|
|Wilshire 5000 Equal Weight||-4.81||+10.78||+8.77||+6.96||+73.28|
|S&P 500 Total Return||-0.61||+12.40||+13.34||+6.80||+94.30|
|Dow Jones Industrial||-2.11||+9.26||+11.38||+7.17||+80.92|
Research Quarterly Summary as of September 30, 2015
Benny Van Huss - Research Analyst
- American Hero Companies - beginning of quarter 115
- Public companies considered for Hero designation 25
- Public companies gaining Am Hero designation 10
- Public companies losing Am. Hero designation 1
- Am Hero Companies receiving annual review 0
- American Hero Companies - end of quarter 124
- American Hero Company candidates - end of quarter 51
More information about our research methodology can be found in the American Hero Companies section of our web site.