Dan’s Blog

Growth Slows Significantly, Stocks Inch Up Anyway

Dan Calandro - Monday, July 30, 2012
Investment is about one thing – growth. Stocks perform best when economies are
growing briskly in Real terms. Real growth, as we know, is growth adjusted for inflation. For some reason it has gone largely unreported that Real growth dropped more than 20% from the first to second quarters’ of 2012. Here’s the table of comparison.

Annualized

Q1 2012

Q2 2012

Change

% Change

Real Growth

1.9%

1.5%

-0.4%

-21%

Inflation

2.2%

1.5%

-0.7%

-32%

Nominal growth

4.1%

3.0%

-1.1%

-27%


First of all, these numbers stink. Two percent Real growth – let alone 1.5% – should be considered nothing short of economic failure. The U.S. economy needs to grow much faster than this pathetic pace to afford the massive $15 trillion of national debt that continues to mount. Monetary and fiscal policies have been atrocious for far too long and an over-active Fed is threatening more easing once again. This is not good. For as long as the Fed’s money game continues to make irresponsible government easy, the more reckless government will get.  

A soft dollar and rock bottom interest rates are not indicative of a strong economy. Trillion dollar fiscal deficits are not a sign of intelligent fiscal management – especially when they produce such little positive result.  

The Dow’s performance indicates this weakness. Since the 2008 Crash, the Dow Jones Industrial Average has been unable to outperform Gross Domestic Product (GDP). During times of expansion, like the housing boom (see 2007 activity in the below chart), the Dow will have little trouble outperforming Nominal GDP. But in times of economic stress (like today) the Average barely produces any Real return. Note the "inflation gap" in the chart below. Remember, the spread between Nominal and Real GDP is inflation.  

7-27-12a

During this time the Dow is up 4% and inflation was 10% – in other words, the Dow has lost 6% to inflation since 2007. The Dow looks like it's up but it’s really down. That’s why inflation is called the "silent killer" – it kills your monetary value without announcement like a thief in the night. If your stock portfolio hasn’t outperformed the DJIA since 2007 then you have been losing money! 

It’s time to turn that around by positioning your portfolio in a way to outperform "the market" in any environment. That starts with superior 15-51 construction. Below is the same exact chart shown above but with the 15-51 Indicator inserted for comparison.

7-27-12b

That’s what I’m talking about. The 15-51 Indicator produced an amazing 135% return since the beginning of 2007 – a Real return of 125% (after inflation.) 

15-51 methodology is that good. It is the solution to uninspired portfolios that can’t outperform inflation or the market Averages. It also makes it easier to sell high – because "high" is easier to see, and more easily had. And that makes making more money easier. (Try saying that three times fast.)   

While long term trends are most important to grasp, it is always a good idea to know what the short term picture looks like. This provides the investor with a clearer overall view of the stock market cycle. Below is a year-to-date look.

7-27-12c


Both the Dow and Gold look confused, up 7% and 4% respectively, traveling almost in unison when they should be moving in opposite directions. The 15-51 Indicator had a huge, steep rise early in the year and has held onto most of its gain, up 20% for the year thus far. The 15-51 Indicator shows that recent stock market inflation is a strength driven "rally." Knowing that the long-term view of the economy is weak (see above charts), it’s easy to ascertain that stocks are overvalued at these levels. There’s simply no juice in the engine.  

In difficult market conditions such as these, investors lose tolerance for higher risk stocks by instinct and shift their focus to consistently strong performers. This propels strength far beyond the market averages. That’s why the 15-51 Indicator, a market portfolio designed with above-average construction and components, consistently outperforms the major Averages. Superior construction produces superior results. It's completely logical.

As mentioned in my book, the investment markets give investors many opportunities to take profitable action – especially if you know where you are in "the market" cycle. Roght now stocks are high, gold is poised for growth, bonds aren’t worth the trouble, and cash is king. You can’t buy low without it. 

Patience and discipline are always required; and an ounce of preparation will produce ten pounds of return.
 
An opportunity is on the horizon. Plan your work and work your plan.  And let me know if you need help.

Until then, stay tuned…

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