We were encouraged by several pieces of economic news today: 1) Private employment, which excludes government jobs, climbed by 206,000 this month, according to data today from ADP Employer Services survey. This is the highest growth level so far this year. 2) The Institute for Supply Management-Chicago Inc.’s business barometer (PMI) increased to 62.6 in November from 58.4 in October led by strengthening industrial orders and production. The PMI new order index, an important leading indicator, rose to the highest level since March. 3) The German Federal Labor Agency reported that unemployment in Germany dropped more than forecast in November to 6.9%. Also, German business and consumer confidence rose in November. 4) The National Association of Realtors’ index of pending home sales increased 10.4%, the most since November 2010. 5) Today’s global central bank actions are positive for liquidity of the European banking system. This data supports a continued improved outlook for the U.S. economy and bodes well for acceleration in U.S. GDP growth in Q4 and 2012, in our view, and also supports the outlook for further growth in U.S. corporate earnings in 2012, a positive for U.S. equities.
What’s the downside? As it has been for some time: risk of a meltdown of the European financial system resulting in collapse of the Euro and implosion of the European economy. This has global financial and economic risk implications. Today’s actions by both Italy and global central banks are an encouraging sign that 1) European leaders understand the urgency of their situation, and 2) we are seeing more concrete measures being taken to address the problems in Europe. We remain concerned that the Eurozone countries continue to face massive headwinds in reaching a workable solution that will maintain both the integrity of the European Union and the Euro as viable currency.
Implications for financial planning: While today’s rise in the stock market is encouraging, we by no means believe volatility is going away. Western economies, including the U.S., are facing massive debt and fiscal problems that will take years to fully address and that will continue to present significant risk to the financial environment. From a portfolio perspective, we continue to advocate above average cash holdings and broad diversification with respect to asset class and geographic and sector allocation in order to mitigate portfolio volatility. We would also add that today’s rise in the market is a perfect example of why we believe people need a sound financial plan and should stick to it, rather than trying to time the market.
BT for S.R. Schill & Associates, Mercer Island, WA
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