Charles Schwab

CHARLES SCHWAB on the uS Market

Teetering on the edge?

US economic growth remains sluggish and the risk of recession is rising as the so-called “fiscal cliff” approaches. We've heard major multinational companies, especially those involved in the shipping and delivery businesses, highlight their increased concerns about global economic growth. Recent reports also indicate that businesses are holding back from capital spending at the moment. We continue to hear unreliable reports that executives are waiting for both the election results and some resolution to the fiscal cliff before making their most significant spending decisions. Unfortunately, concerns like these about growth can be self-fulfilling, as lower demand can lead in turn to economic contraction.

Stocks have paused for breath over the past couple of weeks, following their impressive gains so far this year. As we've seen throughout 2012, stocks often climb a "wall of worry" and we think the path of least resistance for stocks in the longer-term remains upwards. Ample cash remains on the sidelines, investor sentiment is not much worse than uncertain, and the US Federal Reserve remains aggressively easy. We suggest using any pullbacks to add to positions as needed to bring or keep equity allocations in line with long-term goals.

We continue to believe that the USA will avoid a recession in the near term, although fourth-quarter growth could still be weak. Recent data however has been moderately encouraging, with the Institute for Supply Management's Manufacturing Index move back above 50, to

51.5, after being below the line which divides expansion and contraction for the last three months. In addition, car sales continue to improve, which in turn is giving added impetus to consumer spending. Retail sales improved by 4.8% in July and 6.1% in August, according to Thomson Reuters. In summary, while not exactly robust, this also does not indicate a recession. Along with improved balance sheets and a better housing market, the consumer is helping support economic growth.

The jobs picture also doesn't indicate robust growth, but doesn’t indicate a recession either. ADP reported that payrolls in the private sector rose by 162,000 in September, while the government’s own measure said 114,000 jobs were added, although readings for the previous two months were revised higher and the unemployment rate, tied to

the "household survey," fell to 7.8%, its lowest level since January 2009. In support of that lower rate of unemployment, jobless claims fell sharply in the latest week, albeit from a large revised adjustment emanating from one single state.

Retail sales improved by 4.8% in July and 6.1% in August, according to

Thomson Reuters.

With the election coming up, and the fiscal cliff looming at the end of the year, markets appear to increasingly have their eye on Washington. The partial paralysis evident by businesses poses a further risk to the economy but there remains a possibility of "uncertainty

fatigue." Nevertheless at some stage,

business leaders may grow weary of restraining themselves due to tax and regulatory uncertainty, and "animal spirits" and pent-up demand could win out.

In all, it appears to us that US growth remains stalled, and the risk of a recession risk is higher as we move towards the end of the year. However, we are encouraged by some recent positive US and global economic data. After a period of lacklustre action and amid continued investor scepticism,

stocks have the potential to move higher, as excessive optimistic sentiment is worked off, although volatility could rise as we head toward the end of the year. We continue to suggest investors maintain a diversified portfolio, add to stocks amid pullbacks whenever needed, and maintain exposure to fixed income securities for any of their fixed payment needs.

Kully Samra, UK Branch Director, Charles Schwab