What is a six letter word that’s great for the markets and your portfolio?
G-R-O-W-T-H.
In case you didn’t know, last month marked the hundredth anniversary of the crossword puzzle. The New York World published the very first one on Dec. 21, 1913. It was originally called the ‘Word Cross’, designed by Arthur Wynne. Since then, they’ve become been a fun diversion and a helpful tool for building a better lexicon in any language.
My grandparents introduced them to me as a small child. They would both do the puzzles from the New York Times, Philadelphia Inquirer as well as the now folded Philadelphia Bulletin. Doing the puzzles with my grandfather gave me my initial workout on words and research as well as disappointments when those last few words just wouldn’t come together to finish one of them off.
It formed the foundation for how I approach problems today – including puzzling out what’s going on in the markets.
So it seems appropriate to start this note with a crossword clue for a word that’s currently on every investors’ lips…G-R-O-W-T-H.
In December, the U.S. Department of Commerce reported that the economy expanded by 4.1% in the third quarter – almost back to the heady growth seen in the days before the financial fiascos of 2007-2008. Not only was it well above the initial estimates…it was also much better than analysts were expecting.
In addition, the internal rate of price inflation was actually down from earlier preliminary indications. The Core Personal Consumption Expenditure Index (PCE) was said to be rising by 1.5% – well below the 2.5% the Federal Reserve Bank’s Open Market Committee warned would be the signal to tighten money. But now it seems that the PCE is only rising at a rate of 1.4%.
Both the GDP and PCE indicate that the economy is faring better. Consumers are spending, businesses are investing and inflation is still tame by the official standards.
So fears of FOMC tightening should be set aside, and the markets should look for better performances by more and more companies – justifying higher stock prices.
And with lower inflation pressures – at least in the index that matters more to investors and the Fed – the value of dividend-paying income investments should also see the benefit of less of an attack from inflationary conditions.
In addition to the nice bit of economic news, the guys and gals in the US Senate also did some good work for the markets late last year by passing some budget legislation, including the budget for the Defense Department.
While there is still some further work on debt limits, for the most part we’re seeing Congress’ financial brinksmanship getting pushed back in the closet.
This means less uncertainty – and even if the deal isn’t what we as taxpayers might prefer, the markets like it when things get done and there’s some degree of knowing what’s coming.
So, good growth, lower inflation and stability. That should lead us into the New Year with a positive start.
Adding to the mix, of course, is that the Fed also assured us that they will keep spending $75 billion a month on Treasuries and mortgage securities – continuing to swell its portfolio by the trillions of dollars.
And not only will the Fed keep buying new debt, but all of the coupon payments and maturities of its massive Treasury and mortgage portfolios will keep being re-invested – meaning that the $75 billion is just part of the massive continued bond buying that’s not going away any time soon.
Our six-letter trend (G-R-O-W-T-H) looks set to payoff in 2014.
All my best,
Neil George
Contributing Editor, Money Morning
Ed Note: The Six-Letter Solution for 2014 Profits was originally published in Daily Resource Hunter.