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2/18/2013

Is there anything out there that can derail the Goldi-Locks scenario the equity markets are pricing in ?....you bet there is and it's not the upcoming US budget negotiations.

You’ve seen the impressive run the US equity markets have posted so far in 2013…just about 6% for the broad market.  The hype has been running with the bulls as analysts cite an improved housing market, impressive corporate profits, the avoidance of the fiscal cliff a few weeks ago and of course, lack of alternative investments that offer any attractive positive returns.  The result has been that stocks just keep grinding higher. It seems as if it’s a slam dunk….just jump in !!

Well, there may be a looming albatross already in place that has to do with a drop in consumers’ disposable income that has taken many by surprise in 2013.  The negotiations ending 2012 regarding the fiscal cliff seemed to have given many the idea that a tax hike had been averted.  However, paychecks for many are down from 2 to 3% given the re-set of social security contributions and some odd healthcare increases.  Yes, taxes have gone up and disposable incomes down and most haven’t noticed this until mid to late January. 

This couple of percent increase in the tax rate may not seem like much, but the problem is that a significant number of US consumers have been operating on survival mode budgets as wage growth has remained stagnant for years.  The drop in disposable income, if it is a problem for consumption and therefore business activity, will most likely not be noticed until the release of February’s economic numbers due out over the next weeks.  Bloomberg news already reported problems with Wal-Mart’s February’s numbers.  This may just be the tip of the iceberg.

Goldi-Locks you say?  I think I heard that nonsense right up until 2007 when reality set in.  But just to provide a balanced view; if the next string of consumption related numbers comes out OK over the next couple of weeks, perhaps the economy is stronger than this team thinks.

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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