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!
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