Hutchens Investment Management Reports on Economic Progress - January 2013

Jan. 16, 2013 - PRLog -- As we move through earnings season, the results will be overshadowed by the confusion in Washington.  Unfortunately, this state of affairs, heightened by headline news, will continue well into February and maybe beyond, said David Minor of Hutchens Investment Management.

The year ended with a victory for Obama on taxes and no progress on solving the spending problem. Many believe that the GOP will allow the Sequester despite the massive cuts to defense.  Who knows, but until there is an agreement on the debt ceiling and spending, markets will be dominated by short-term events relating to government inaction and to a lesser extent, 2013 earnings guidance.

Fourth Quarter earnings forecasts have been scaled back as technology and financials had cuts of about 10% in estimates over the three months ended in December.  Tech reflects declining PC sales and their effect on traditional chip companies.  However, cloud related, Internet security and commerce have held strong.  Financials are struggling with increased regulation, as Dodd-Frank is only beginning to be implemented, and the cost of rebuilding reserves.  We believe that many S&P 500 companies with healthy cash flow and low debt levels will surprise the lowered forecasts and set all-time highs with quarterly earnings.  It is obviously a stock pickers market.

On a brighter note, the much-anticipated shift away from equities into fixed-income, which began with the financial crisis, shows signs of reversing.   During the 2008-2012 period, equity mutual funds experienced a net outflow of $526.9 billion while bond mutual funds had a net inflow of $1.1 trillion (money market mutual funds had a net outflow of $1.3 trillion).  This trend is confirmed by “Weekly US Equity & Balanced Mutual Fund Flows” published by Morgan Stanley.  According to this report, equity mutual funds and ETF inflows could continue to drive consumer optimism.  While we would expect the individual investor to eventually return to the historic level of equity ownership, this may take longer than anticipated.  However, the reluctance to invest in stocks and equity related instruments is governed by sentiment rather than conventional fundamental analysis.

The individual investor, whose ownership of equities has declined significantly over the past few years, has been battered by fear.  For those who have remained employed, the fear of losing a job resulted in increased savings.  This trend began to lessen in 2012 as unemployment slowly declined and the employed increased spending.  More importantly has been the bottoming in housing.  As the inventory of homes declines and foreclosures lessen, consumer sentiment increases.  Should interest rates begin to move higher, investors in fixed-income mutual funds and bond ETFs will become painfully aware of the declining market value of these portfolios.  The Fed claims it will keep rates at current levels for as long as necessary, so this potential catalyst for equities may not occur until further along in the rate cycle.

Based on our analysis of the investment environment, we remain cautious.  We maintain a balanced portfolio of domestic equities, fixed-income, ETFs, including housing (ITB), MLP’s, gold (GLD) and silver (SLV).