The expression "cautious optimism" is being bandied around by economists, government, and media on the state of our economy as we tiptoe into 2010. First, I don't have to mince words in saying that late 2009 was one heck of a rollercoaster ride. We were scraping bottom with our returns in the early first quarter of 2009, but then the upward spiral began and we ended the year on a high note.
Consequently, every investor wants to know what's ahead for 2010? There's no shortage of experts turning out reams of copy and telling us what's next for the millions of us with our wealth salted away in 401(k)s, savings accounts, IRAs, money markets, CDs and other revenue producing vehicles.
For the glass half-full crowd, of which I am a member, things are looking up. After a strong recovery in the second half of 2009, most economists and our government are predicting a moderate growth in the first half of 2010. If you follow the GNP's (gross domestic product, adjusted for inflation) 11 economic indicators, the decline in economic growth bottomed out in March 2009 from 5.9 percent to an increase in positive territory of 2.7 percent in December. Not much to write home about, but some hope that the worst is over, and our economic recovery will take its place in the history books as the deepest and longest recession since the 1930s.
So, returning to the glass half full philosophy, despite the lower reading of 2.7 percent, the economy managed to finally return to growth during this last quarter after a record four straight quarters of decline.
Federal Reserve Chairman Ben Bernanke spoke to the Economic Club of New York on November 15, and reminded us that the flow of credit remains constrained, economic activity weak, and unemployment much too high. That didn't prevent Bernanke from predicting that we would experience "moderate" growth in 2010 with little inflation.
The reasons we can't get as much traction as we would like with our economy this year can largely be attributed to two factors: constrained bank lending and the weak job market. High unemployment -- now at 10 percent -- and tight credit for both consumers and businesses are expected to continue to weigh on the economic recovery.
I do see employment improving slowly. Temporary employment is rising at a fast clip, 28.7 percent on a three-month annualized basis. This is key indicator for the job market. Why? Companies are seeing an increase in demand for their product or service. To meet that demand, they need more workers. For the time being, they are hiring temps to hedge their bets before going to permanent hiring.
In addition, loans to businesses are rising. Yes, loans to small businesses are very subdued, and many have been utilizing mortgage refinancing and credit cards inject funds to finance or start up a business. There are indications that the banks are easing their financial restrictions as commercial paper and corporate bond issuance are recovering. In the past, bank loans have followed the upward or downward trend of nonbank loans.
And, leading indicators of 39 of the world's largest economies are beginning to experience growth. This should trigger a demand for U.S. exports. Indeed, U.S. exports are experiencing a 25 percent increase annualized rate as of October.
What's an advisor to do with clients that wish to stay with the ride or are rearing to get back into the market after the surge experienced during this last quarter? What does it mean when we hear that only moderate economic growth is predicted by most economists in 2010? Our advice is to keep your clients from reestablishing boom-time habits.
1. Advise your clients not to abandon their savings fervor. If your clients are like most U.S. households, they are probably saving more than they did in recent years. The research shows that the personal savings rate for most people often falls following a recession. Tell them to keep socking money away, even as times get better.
2. Advise your clients to show restraint entering the market. As money-anxiety wanes in the New Year, self-restraint may go in the opposite direction. Tell your clients to exercise restraint when re-entering the market after this long dry spell.
3. Advise your clients not to chase performance. Tell your clients to keep a cool head and only indulge in "opportunities" with, say, 5 percent of their portfolio. Clue them to be wary of hot stocks or hot funds.
Another thing that has cropped up in dealing with your clients in this new year of 2010 is handling them with a "value enhancement" approach, rather than a "fee enhancement" mentality. Forget about your fee (what goes around, comes around). Make sure your clients obtain perceived value from your advisor services. This is all-important, as the latest research shows that clients are demanding value from their advisors after the experience of this financial downturn that has affected all of us differently than when we were in calmer economic waters.
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