Don’s Outlook 6/26/09
Last weekend I had the chance to attend an annual charity event that I enjoy. In addition to the charitable giving opportunity, the event provides a rare opportunity to speak with one of the world’s legendary investors, Warren Buffett.
The event began Friday night with a reception where I had the opportunity to ask Buffett what his prediction was for the economy. Buffett was very optimistic in his outlook. He believes that we will survive the current recession and reminded me that Americans have seen a seven-fold advance in the standard of living over the past century—and that there had never been anything like that in the history of the world.
Buffett also addressed the assembled crowd on Saturday and noted that in the last 100 years, we have survived the Great Depression, two World Wars, the Cold War, and the Atomic Bomb; the country has moved forward, and it will move forward again. Moreover, no one has ever “bet against the U.S.” and won. He also noted that still “people were trying to get in, not leave” the United States. We have always been a country of renewal, one in which ingenuity thrives and economic progress prevails.
There was a mild correction in the past week, but the S&P 500 Index has fought its way back to even territory. The benchmark index has spent the better part of this month above its 200-day moving average, a feat last achieved in 2007.
Economic data out this week was mostly positive. Instead of a 5.7 percent decline in GDP, the Bureau of Economic Analysis reported that first quarter GDP fell at a 5.5 percent annualized rate. The smaller decline was the result of adjustments to imports and inventories. Accompanying the GDP release was data on initial claims for unemployment, which were up slightly from last week but still well below the highs set earlier this year.
Earlier in the week, durable goods orders increased 1.8 percent, well ahead of expectations of a decline. A very positive sub-figure was the 4.8 percent increase in non-defense capital goods excluding aircraft. Capital investments are the driving force of higher wages and economic growth.
Home sales were a mixed bag, with existing-home sales increasing and new-home sales declining. New homes are less attractive than foreclosures and the difference in price leads to the discrepancy. Eventually, existing sales will decline and new home sales will increase to close the gap, but it’s unclear where these numbers will settle.
Overall economic data show that the economy’s contraction is slowing. Growth has yet to arrive in force, but the natural process of recovery is underway. Optimism has emboldened investors and politicians alike, and the appetite for further government action is dwindling. Two major issues, climate change and health care, could be defeated due to concerns over current economic growth and the burgeoning deficit. If these worthwhile efforts failed, I believe it would be bullish for most stocks, because both are clouds of uncertainty hanging over the economy.
