The beast measure of the U.S. economy’s health—wages and salaries—indicates the U.S. economy is losing momentum. We measure wages and salaries in real time based on the income and employment taxes withheld from the paychecks of the 130+ million salaried U.S. workers. Adjusting for our revised estimates of the “Making Work Pay” tax credit and COBRA withholding tax reimbursements, income tax withholdings rose only 2.1% year-over-year in the two weeks and four days ended Wednesday, July 28 (Friday, July 9 through Wednesday, July 28). This growth rate is below the growth rate of 2.7% year-over-year in the past three months, suggesting withholdings are flat to slightly lower sequentially.

Red ink is flowing unabated in Washington. The Obama administration projects that the federal budget deficit will reach $1.47 trillion in fiscal 2010 and $1.42 trillion in fiscal 2011. Both of these amounts are little changed from the $1.41 trillion in fiscal 2009.

While the administration estimates that annual deficits will fall below $1 trillion starting in fiscal 2012, these improvements are based on fantasyland assumptions. The administration projects that real GDP will rise at least 3% per year from fiscal 2012 through fiscal 2016. How will this growth occur when taxes are set to rise and the government is adding thousands of pages of regulations on finance and health care?

The homebuyer tax credits succeeded mostly in pulling forward housing demand. Now that the U.S. government is longer doling out cash to people to buy homes, home sales are slumping. New and existing homes sales fell to 5.70 million at a seasonally adjusted annual rate in June. This level was 17% below the interim peak of 6.86 million in November 2009 and the lowest level since February. Absent more government stimulus, we doubt home sales will pick up anytime soon. Although 30-year fixed mortgage rates are at a record low of 4.54%, the Mortgage Bankers Association’s purchase applications index was only 6% above its record low in the week ended Friday, July 23. The index has tumbled 41% since April 30, when the second homebuyer tax credit expired.

BULLS AND BEARS MAKE THEIR CASE, From Liz Ann Sonders, senior vice president and chief investment strategist, Charles Schwab & Co.

The standoff between the bulls and bears continues and the market remains relatively rangebound. Numerous other standoffs have contributed to this situation as austerity proponents battle Keynesian enthusiasts, the Federal Reserve tries to entice borrowers, small businesses maintain a much different outlook on the state of the economy, and technicians of all stripes argue about various indicators. This uncertainty has led to rangebound action, resulting in some of the highest correlations among stocks ever seen, according to Ned Davis Research’s 63-day correlation measure. The end result of all of this is a potentially difficult and challenging investing environment.

We remain relatively optimistic, but want to remind investors that having a static and dogmatic view without heeding the call of new information can result in being dogmatically wrong. As always, we strongly recommend viewing stock investments over a reasonably long time horizon. Money you might need in the short-term shouldn't be invested in stocks.

Recent action has investors putting more emphasis on technical analysis. We do look at technicals, but not exclusively, as the historical evidence of the accuracy of most technical indicators is spotty—and when effective, they tend to be shorter-term in nature. Investor sentiment has a better historical record than many technical indicators. Unfortunately, individual investors tend to be good contrarian indicators—meaning stocks tend to rally after sentiment reaches extremely pessimistic levels, much as we saw to start July as the S&P rallied nearly 7% in a two-week period. Sentiment had been crushed thanks to the 16% correction that began after the April market highs. You can try to use this to your advantage in this environment as we shift between pessimism and optimism by adding to positions as needed during periods of extreme worry and doubt, and reducing stock allocations as appropriate during times of extreme optimism.

WILL CONSUMERS OPEN THEIR WALLETS? From David Kelly, Chief Market Strategist, JPMorgan Funds

Last week’s GDP report provided a balanced dose of good and bad news.  The recession of 2008-2009 now looks even deeper with a 4.1% drop in output from peak to trough, compared to an originally estimated 3.8% decline.  Over the past year the economy has embarked on a clear, albeit tepid recovery, growing by 3.2%. Businesses have done their part – at least in terms of spending – with gains in inventory investment and business equipment spending accounting for almost 90% of the GDP growth in the recovery so far. However, as the recovery moves into its second year, it is clear that households will need to contribute more to the recovery going forward.  Most notably, both auto sales and housing starts remain at extremely low levels for an economy supposedly on the mend.
So are consumers ready, willing and able to do their part?  On the “able” side of the question, the answer appears to be “yes”.  In the years since the end of the housing bubble, consumers have postponed big-ticket purchases and paid down debt, while a relentlessly easy monetary policy has facilitated a steady wave of mortgage refinancing. Meanwhile, revised government data show that disposable income has been growing at a moderate pace over the past nine months. All of this, taken together, has allowed the personal savings rate to rise from 1.8% less than three years ago to 6.2% in the second quarter of this year, the highest savings rate seen in 17 years.  With some improvement in stock market wealth, some increase in employment, and pent-up demand for housing and autos, households ought to be able to contribute more to the second year of this recovery than the first.  

The question is “will they?” Numbers due out this week should shed some light on this question. Tuesday’s numbers on both Light Vehicle Sales and Pending Home Sales should show some increase from recently dismal levels, while Thursday’s numbers on chain-store activity should give a broader sense of consumer activity.  

APPROPRIATE BENCHMARKS FOR CLIENT REVIEWS, From Stephen J. Huxley , Chief Investment Strategist, Asset Dedication

Client reviews often include performance comparisons with relevant indexes as benchmarks. Large cap funds are usually pegged to the S&P 500 index, small cap to the Russell 2000, etc.  And if each of the client’s investments matched its index benchmark, then it would tell the client ….what?    
Well, it would tell them nothing more than that performance matched the indexes.  What it doesn’t tell them is whether their portfolio is meeting their long term goals, which is usually the most important benchmark.  
Creating a “critical path” benchmark that projects the client’s lifetime financial goals at each point in time will provide a foundation for financial decision.  This type of projection should flow out of the financial planning process where the advisor elicits the client’s goals and develops a capital needs analysis.  Using the client’s actual goals as a benchmark is not only more intuitive to the client, but also provides a much better platform for informed decision making.


Monday, Aug. 2:

ISM Mfg Index, Construction Spending, 4-Week Bill Announcement, 3-Month Bill Auction, 6-Month Bill Auction.

Tuesday, Aug. 3:

Motor Vehicle Sales, ICSC-Goldman Store Sale, Personal Income and Outlays, Redbook, Factory Orders, Pending Home Sales Index, 4-Week Bill Auction.

Wednesday, Aug. 4:

MBA Purchase Applications, Challenger Job-Cut Report, ADP Employment Report, Treasury Refunding Announcement, 3-Yr Note Announcement, 10-Yr Note Announcement, 30-Yr Bond Announcement, ISM Non-Mfg Index, EIA Petroleum Status Report.

Thursday, Aug. 5:

Chain Store Sales, Monster Employment Index, Jobless Claims, EIA Natural Gas Report, 3-Month Bill Announcement, 6-Month Bill Announcement, Treasury STRIPS, Fed Balance Sheet, Money Supply.

Friday, Aug. 6:

Employment Situation, Consumer Credit.

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