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Naughty or Nice?

December 12, 2011 — Leave a comment

Weekly Update – December 12, 2011

 

Yet again, investors found themselves watching Europe last week – no surprises there – and were apparently pleased with what they saw. Word of a “new deal” incited a rally in stocks Friday that pushed the Dow Jones industrial average up 187 points, or 1.6%, the S&P 500 up 21 points, or 1.7%, and the Nasdaq up 50 points, or 1.9%.[i] All major domestic indexes finished positive for the week on a wave of optimism.

 

What is this “new deal” everyone’s talking about? Basically, the 17 nations that use the euro agreed to sign a treaty that allows a central authority to oversee their budgets more closely. The agreement is made up of fiscal rules designed to prevent countries from veering further into crisis mode, and to rescue them if they do. The Friday proposals also commit the countries to put their €500 billion ($670 billion) European Stability Mechanism bailout fund into action next year, instead of in 2013.[ii]

 

While Britain chose not to support the plan, the majority of EU members are hailing this as a new beginning. German Chancellor Angela Merkel expressed that Europe has “…achieved a breakthrough to a stability union. A fiscal union, or stability union as I call it, will be developed further, step by step in the years to come.” And French President Nicolas Sarkozy confidently boasted, “We’re doing everything we can to save the euro.”[iii]

 

Whether this deal will be a new beginning for Europe, or turns out to be little more than political posturing, only time will tell. Either way, we are confident their debt saga is far from over. While tighter fiscal controls are definitely a crucial ingredient in mending this crisis, Friday’s agreement is only a partial solution, and we have seen agreements like this deteriorate before. Until a clear path to fiscal austerity has been established for the region, the markets will keep responding to hype and headlines.

 

When it comes to investing, rather than reacting to every shred of nice (or naughty) news, we still believe it is better to have a long-term plan and stick to it. We take great pleasure in helping you do just that!

 

ECONOMIC CALENDAR:

 
Monday – Treasury Budget

 
Tuesday – Retail Sales, Business Inventories, FOMC Meeting Announcement

 
Wednesday – Import and Export Prices, EIA Petroleum Status Report

Thursday – Jobless Claims, Producer Price Index, Empire State Manufacturing Survey, Industrial Production, Philadelphia Fed Survey

Friday – Consumer Price Index

Quarterly Review

October 4, 2011 — Leave a comment

Week of October 3, 2011

From the debt ceiling debate, to S&P’s downgrade of the United State’s prized bond rating, to ongoing challenges in the Eurozone, and wild swings in the stock market, the third-quarter has taken investors for quite a ride!

market swing in third quarter 2011

July – After a volatile first half that eventually ended U.S. stocks in positive territory, the debt ceiling debate quickly took center stage. As policymakers debated ways to cut spending and raise the nation’s borrowing limit, stock markets faltered.

August – Following an eleventh hour debt ceiling compromise, Italy rose to the forefront of debt problems in Europe and anemic economic news pushed investor sentiment downward. As fear dominated the markets, major indexes erased their gains for the year during the first week of the month. Hitting especially close to home, S&P downgraded the nation’s bond rating from AAA to AA+ on August 5.

September – After a brisk market rally early in the month, European debt woes dominated investor sentiment once again. By the middle of the month, tables turned dramatically as many asset classes experienced their worst weeks in years. Even gold faced its largest monthly fall since October 2008. In conjunction with persistent concerns about European debt and a weakening U.S. economy, the Fed’s Open Market Committee (FOMC) launched “Operation Twist” on September 21st, leading to further selloffs.

In reading the quick summary above, it’s easy to see why investors could be forgiven for feeling somewhat dazed and confused. The last three months have been rough. The stream of bad news coupled with occasional flickers of optimism led to one of the most volatile periods ever for stocks. The Dow moved more than 200 points on 18 separate times during the quarter, swinging by more than 400 points on four consecutive days in August alone. When you couple the nauseating stock market performance with anxiety about the European sovereign-debt crisis and headlines forecasting a double-dip recession, it’s no wonder people are running scared.

Now What?

While past performance doesn’t guarantee future results, some investors are taking comfort in the fact that the third quarter, historically, has been the worst of the year, and the fourth quarter is typically the best. And while some are finding it difficult to be optimistic, others are turning their sights to corporate earnings for a barometer of where the economy is headed. Companies will start releasing their third-quarter reports in coming weeks.

Interestingly, the third-quarter edition of the Investment Manager Outlook (a survey of investment managers conducted by Russell Investment Group and released 9/29) found that 78% of managers do not expect the U.S. to slide into a double-dip recession. “Strong corporate balance sheets and high corporate profits should ensure that the United States avoids a new recession. However, Russell also believes, along with the majority of the managers surveyed, that we will see a slow-growth trend for the next several years, as well as ongoing market volatility,” the report stated. We agree with this assessment.

As long as confidence in the global economy and government policymakers remains shaky, markets are likely to be volatile. Even so, we still believe that fundamentals are strong in many areas, and we know that successful investing is a long-term project undertaken with risk and uncertainty. Equity markets do not move in a straight line, and neither do economic recoveries. Despite being painful, volatile periods like this historically run their course and then come to an end.

We understand that fear can be contagious, but we urge you not to let yourself be overtaken by it. While many types of investments are currently experiencing a difficult period, we believe that those who remain committed to their long-term investment plan will be rewarded over time.

If you have any questions or would like any guidance, please don’t hesitate to reach out to us. We consider it a great privilege to help you protect what you’ve worked hard to earn.

Weekly Update – September 19, 2011

U.S. stocks posted solid performance Friday to wrap up a five-day winning streak for the first time since July. The Dow and the S&P 500 were each up around 5% for the week, while the NASDAQ climbed 6.3% for the week. The five-day move was the best we’ve seen in two years.

Stocks rallied Thursday after the European Central Bank announced a coordinated action with other central banks and the U.S. Federal Reserve to offer banks easier access to dollar loans. That move, combined with comments from French and German leaders expressing confidence in Greece’s place in the euro-zone, helped propel the market’s performance last week.ii It is likely that comments from European leaders and bankers will continue to drive investor sentiment as the debt crises in Europe continues.

It is against the backdrop of European woes and a softening U.S. economy that the Fed will hold its policy-setting meeting Tuesday and Wednesday. The Federal Open Market Committee expanded its meeting from one to two days, which some investors have taken as a signal that action will be taken, though what that action will be is not clear.

One suggestion is that the Fed will try to pump money into the economy by purchasing bonds through a third round of quantitative easing, known as QE3. But this modified version of QE3, coined Operation Twist, would involve trying to boost lending by swapping out short-term bonds with long-term ones. The intended outcome of this swap would be to lower long-term interest rates without increasing the size of the Fed’s balance sheet. At this point though, we can only speculate about what the Fed will do.

In the week ahead, eyes will be focused on Europe and the Federal Reserve as they work to keep money flowing around the world.

  • Monday – Housing Market Index
  • Tuesday – Housing Starts, FOMC Meeting Announcement
  • Wednesday – Existing Home Sales, EIA Petroleum Status Report
  • Thursday – Jobless Claims

President Barack Obama said on Saturday that Americans need to be ready to “pay their fair share” to narrow the deficit, previewing his proposals to Congress that are expected to include more taxes on the rich. On Monday, the President will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials.

Wall Street was cordoned off for a second consecutive day Sunday as about 300 to 400 people remained near Chase Manhattan Plaza for a protest dubbed “Occupy Wall Street.” A smaller group, followed by a column of police motorcycles, marched uptown on Broadway as people beat drums, strummed guitars, and held up signs reading “end corporate welfare” and “we are too big to fail.”

With Europe’s credit and banking crisis seeming to get worse by the day, there are now several reports that Brazil – as well as Russia, India, and China – may look to buy up a portion of sovereign debt from troubled European nations. The creation of a so-called euro bond, which would act as a common debt instrument much like the euro now acts as a unified currency, has been mentioned by many economists and financial experts as a possible way to help end the crisis.

There isn’t a person anywhere who isn’t capable of doing more than he thinks he can. –Henry Ford