December 2010 Market Commentary

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The Economy

The major headline during the month of December was the agreement reached between President Obama and the Republican leadership, allowing a two-year extension of the Bush-era tax cuts that were to expire on December 31, 2010. The compromise included a one-year reduction in Social Security employee contributions from 6.2% to 4.2%, a provision to allow businesses to fully expense investment spending in 2011, and an extension of unemployment benefits. While the market rallied on the legislative agreement, the Congressional Budget Office estimated the corresponding reduction in Federal revenue to be $857.8 billion. It now appears that the federal budget deficit will exceed $1 trillion for four straight fiscal years of 2009 through 2012.

Fourth quarter U.S. gross domestic product (GDP) is expected to recover all the output lost in the deep and lengthy recession, thereby transitioning the economy from recovery to a new expansionary phase. The ISM Manufacturing Index continued to indicate economic expansion within manufacturing businesses, holding above 50 for the seventeenth consecutive month. Early holiday shopping resulted in a 0.8% increase in November retail sales, beating expectations. On the employment front, the ADP jobs report on January 5 indicated that the private sector added 297,000 jobs in December, the largest increase since records began in 2001. This hiring helped to lower the nation’s unemployment number to 9.4%. However, the recovery in employment thus far remains subpar compared to historical recoveries, and the actual unemployment rate is much higher when including discouraged and underemployed workers.

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