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Weekly Update – January 22, 2013

Markets closed out another positive week, shrugging off lackluster consumer confidence and
moderate earnings reports to hover around multi-year highs. For the week, the S&P 500 gained 0.95%, the Dow gained 1.2%, and the Nasdaq gained 0.29%.[i]

In Washington, Congressional Republicans backed off from a debt showdown against a
resolute President Obama that could have risked a government default on debt. Republicans said they were prepared to raise the debt ceiling and allow the federal government to borrow operating expenses for the next three months, kicking the fiscal can further down the road.[ii]

To be frank, we’re frustrated with Congress’ inability to make hard choices about spending
and debt. Allowing the U.S. to fall into default would be catastrophic, given that the world treats U.S. government debt as essentially default risk free. Despite their promising rhetoric to use the debt ceiling debate to force widespread fiscal reform, many politicians seem to have abandoned that position in favor of baby steps.[iii]

Federal Reserve Chairman Ben Bernanke spoke on Monday, showing support for the fiscal
cliff deal reached on January 1, but emphasizing that lawmakers still need to come to an agreement over the debt ceiling. The chairman also claimed that the Fed’s unusual December move to tie monetary policy to unemployment and inflation targets was designed to provide financial markets with greater clarity.[iv]

Earnings reports show that the final quarter of 2012 ended well, with many firms
reporting better-than-expected (but not mind-blowing) results. However, business leaders are still cautious, noting that the debt ceiling debate and uncertainty over potentially higher corporate taxes clouds their 2013 outlook. On the positive side, many firms are bullish on the U.S. economy and are confident that trends show an ongoing recovery.[v]

In a rare confluence of events, Monday was both a national holiday and the inauguration
of President Obama’s second term, starting the week off fairly quiet for markets. There will also be relatively few economic reports released this week, meaning that traders will turn their attention to remaining earnings reports from firms like Google (GOOG), Starbucks (SBUX), and McDonald’s (MCD). Investors will also be paying close attention to new reports about the strength of the housing market, which are widely expected to show a continued recovery.[vi]



[i]
http://www.briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-january-14-2013.htm

[ii]
http://www.reuters.com/article/2013/01/18/usa-fiscal-debt-idUSL1E9CI9DZ20130118

[iii]
http://www.reuters.com/article/2013/01/18/usa-fiscal-debt-idUSL1E9CI9DZ20130118

[iv]
http://www.usatoday.com/story/money/business/2013/01/14/bernanke/1833783/

[v]
http://www.cnbc.com/id/100391246

Markets on Edge

December 3, 2012 — Leave a comment

Weekly Update – December 3, 2012

The combination of unease in Europe and political bickering in Congress set equity markets on edge last week. In spite of the turbulence, key indices still managed to close positive for the week, with the S&P 500 gaining 0.5%, the Dow gaining 0.12%, and the Nasdaq gaining 1.5%.[i]

Markets slid Friday after comments by House Speaker John Boehner indicate that fiscal cliff talks have stalled. While the Democrats are seeking $1.6 trillion in tax increases (aimed largely at wealthy taxpayers), as well as $50 billion in additional stimulus spending, Republicans are focused on reducing the deficit through closing tax loopholes and reducing entitlement programs.[ii] Since these are essentially the same issues that have been argued over the last year, it seems as though lawmakers are more interested in theatrics than in resolving the issue before the end of the year.

A Greek aid deal was finally reached Tuesday as European ministers convinced a skeptical International Monetary Fund (IMF) that their formula for getting Greece back on track had good odds of success. The deal will cut Greek interest rates and give the ailing nation additional time to pay back rescue loans while giving it a 34.4 billion-euro loan installment in December.[iii] As part of the agreement, Greece’s debt-to-GDP ratio is expected to decline from 190% in 2014 to 124% in 2020. We hope – rather than expect – that Greece will be able to meet the terms of its new deal. Markets appeared to share our skepticism and did not show much reaction to the news.[iv]

Next week will see the release of some key economic data, including November jobless claims, which we expect to come in lower as the effects of Superstorm Sandy continue to fade. Although Sandy hit in the latter days of October, the Labor department conducts its payroll survey on the 12th of each month, meaning that November data will capture the effects of the storm. We’ll also be able to take a peek at the preliminary consumer sentiment report, which analysts will pore over to get a sense of what holiday retail numbers might look like.[v] We’ll keep you posted. Have a great week!

ECONOMIC CALENDAR:

Monday: ISM Mfg. Index, Construction Spending

Tuesday: Motor Vehicle Sales

Wednesday: ADP Employment Report, Productivity and Costs, Factory Orders, ISM Non-Mfg. Index, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Employment Situation, Consumer Sentiment

 

Data as of 11/30/2012

1-Week

Since 1/1/2012

1-Year

5-Year

10-Year

Standard   & Poor’s 500

0.50%

12.61%

13.57%

-0.88%

5.13%

DOW

0.12%

6.61%

15.97%

-0.52%

4.64%

NASDAQ

1.46%

15.55%

14.88%

2.63%

10.36%

MSCI   EAFE

0.97%

13.78%

11.30%

-4.57%

4.66%

10-year   Treasury Note (Yield Only)

1.69%

N/A

2.07%

3.97%

4.21%

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.

HEADLINES:

Chinese manufacturing expands in November. In a further sign that China may have turned the corner, the country’s official manufacturing index rose to the highest level in seven months. Economists believe that the country may experience additional growth in December due to Christmas.[vi]

European rescue funds downgraded. Moody’s Investors Service downgraded the Eurozone funds responsible for bailing out periphery nations to Aa1 from Aaa. The move was prompted by concerns about the high correlation in credit risk between the rescue funds and the countries funding them.[vii]

Investors flock to Treasuries. Despite the risks posed by the fiscal cliff, investors can’t get enough U.S. Treasuries. Reversing a 6-month trend, Treasury purchases topped corporate bonds as investors piled on, seeking asset protection rather than investment growth.[viii]

Corporations rush to issue debt in 2012. Record-low rates and potential tax law changes are driving a gusher of new corporate debt. The amount of investment-grade and high yield bonds issued this year is already at a record $1.2 trillion and is likely to increase before the new year when applicable tax laws may change.[ix]

QUOTE OF THE WEEK:

You’re happiest while you’re making the greatest contribution.” – Robert F. Kennedy



[i] http://www.briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-november-26-2012.htm

[ii] http://www.bloomberg.com/news/2012-11-29/geithner-said-to-offer-fiscal-plan-with-entitlement-cuts.html

[iii] http://www.bloomberg.com/news/2012-11-26/euro-chiefs-claim-greek-progress-seek-to-persuade-ecb-imf.html

[iv] http://www.briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-november-26-2012.htm

[v] http://blogs.wsj.com/marketbeat/2012/11/30/next-weeks-tape-sandy-washes-over-jobs-report/

[vi] http://www.bloomberg.com/news/2012-12-01/china-s-manufacturing-pmi-expands-for-a-second-month.html

[vii] http://www.cnbc.com/id/50031350

[viii] http://www.cnbc.com/id/50027436

[ix] http://www.cnbc.com/id/50027553

 

Weekly Update – November 12, 2012

The big question last week was: What next? Markets slid as investors reacted to fears about post-election economic policy and renewed turbulence in Europe. Stocks logged their worst week since June, with the S&P losing 2.64%, the Dow sliding 2.12% and the Nasdaq falling 3.16%.[i]

The world tuned in on Tuesday to watch the end of a hotly contested U.S. national election. For those who missed it, President Obama won a second term in office. In Congress, Democrats won a majority in the Senate while Republicans maintained control of the House. Markets started the selloff first-thing on Wednesday as traders responded to concerns about the global economy, driving the S&P 500 down by 2.4%.[ii]  Bonds experienced a dramatic swing as well, as worried investors were driven towards the perceived safety of government securities.

Now that the election is over, analysts and media pundits are turning their attention to the issue that’s been hanging over us for months: the fiscal cliff. The fiscal cliff will likely dominate headlines until an agreement is reached, meaning that we can expect markets to remain volatile. A split Congress will make it difficult for Democrats and Republicans to reach a compromise. Deep divisions between the parties remain, and the debate may continue through the New Year; though we really hope it doesn’t.

President Obama jumped right into the debate last Friday and staked out the Democratic negotiating position by announcing that any agreement must include tax increases on the wealthy. Since this is a major sticking point for Republicans, it is unlikely that a compromise will be reached soon.[iii] If Republicans do not give ground on the issue, Democrats may allow the Bush Tax Cuts to expire in order to gain bargaining power for their own ‘middle-income tax relief’ plan in the New Year.

A more desirable scenario would bring Republicans to the negotiating table for a bi-partisan plan to gradually phase in austerity measures instead of going over the cliff – similar to the 2010 Simpson-Bowles plan. This would set the stage for meaningful tax and budget reform over the next few years and reassure deficit-watchers that the U.S. is managing its debt. The crux of the matter is that while the U.S. needs to get its deficit spending under control (lest we end up like Europe), our still-fragile economy cannot withstand large-scale tax increases and government spending cutbacks.

In short, now that election season is over, lawmakers are faced with major challenges, and we fear that they are more interested in partisan bickering than hammering out a compromise. On the bright side, we see the potential for markets to respond positively when an agreement is finally made. If economic reports remain upbeat, we could see further upside in the near future. As always, we encourage you to remain patient and focused on your long-term financial strategy.

ECONOMIC CALENDAR:

Monday: Veterans Day, Stock Markets Open, Bond Markets & Banks Closed

Tuesday: Treasury Budget

Wednesday: Producer Price Index, Retail Sales, Business Inventories, FOMC Minutes

Thursday: Consumer Price Index, Jobless Claims, Empire State Mfg. Survey, Philadelphia Fed Survey, EIA Petroleum Status Report

Friday: Treasury International Capital, Industrial Production

 



[ii] http://www.briefing.com/investor/markets/after-hours-report/prmw–and-139-slxp–and-86-qcom–and-82-panl-297-mnst-133-following-earningsguidance.htm

[iii] http://www.cnbc.com/id/49759402