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Fiscal Cliff, US Economy and Election ResultsWhat Happens Next?
by Liz Ann Sonders of Charles Schwab,
Even if the United States falls off the "fiscal cliff," the hit to the economy will probably be gradual. And while the fiscal cliff probably figured into the recent market pullback, it's not the only contributor. Resolution to this issue, the continuation of positive trends in housing and manufacturing, and fundamental tax reform could help give the economy a boost.
No New News From the Fed
by Liz Ann Sonders of Charles Schwab,
Given that it's just two weeks before the presidential election and that the Federal Reserve made several key announcements after its last meeting in mid-September, we weren't expecting any fireworks from today's Federal Open Markets Committee (FOMC) meeting.
What Now?
The market appears to be in a "wait-and-see" mode in advance of the elections, but looking beyond November 6th is important for investors. The election is only one piece of the puzzle, and certain aspects of the political landscape likely won't be much clearer after Election Day. Earnings season has been somewhat disappointing, even though there was a relatively low bar to hurdle. We see more signs that the slowdown in the United States may be ending, however, with strength in housing particularly noteworthy.
Teetering on the Edge?
Concerns about a possible US recession remain elevated in light of the pending "fiscal cliff," resulting in some lackluster stock market action. The fiscal cliff and uncertainty around tax and regulatory policy appear to be influencing business decisions to the detriment of economic growth. While worst-case scenarios for Europe may have been taken off the table by the ECB, Spain's reluctance to ask for aid is causing consternation. And although we see continued weak growth in China, signs indicate the global slowdown may be turning around.
Don't Bring Me Down: Not Swayed by Pessimism at BCA Conference
by Liz Ann Sonders of Charles Schwab,
We present highlights, key takeaways and perspective on the recent BCA Research Investment Conference. The eurozone crisis and China's slowdown remain risks, but are somewhat offset by optimism about US markets. Politics will remain a force underpinning uncertainty and volatility.
Schwab Market Perspective: Disrespected RallyCan It Continue?
US equities are trading near five-year highs but numerous measures show investors remain skeptical. The enthusiasm following the Fed's announcement of more quantitative easing was short-lived, although the summer rally in stocks could be at least partially attributed to anticipation of more stimulus. The enthusiasm following the Fed's announcement of more quantitative easing was short-lived, although the summer rally in stocks could be at least partially attributed to anticipation of more stimulus.
Central Banks Take Center Stage
Accommodative central banks have traditionally been good for equities and stocks have responded positively to recent action. However, each market reaction to US Fed action has been shorter in length and challenges persist. Although recent economic data has been beating relatively low expectations, it is still not meeting the Fed's hopes. We appreciate the sentiment of wanting to stimulate growth, but the Fed's power is limited. It's down the street in Washington where the real power to stimulate growth lies.
Profit Motive: If Earnings/Margins Are Peaking, What About Stocks?
by Liz Ann Sonders of Charles Schwab,
Earnings growth has peaked, but don't necessarily assume the same about margins. Present pace of earnings growth has historically been accompanied by decent market performance. Margins are increasingly driven by domestic and foreign earnings, but peaking margins have historically been accompanied by strong market performance.
Young Americans: The Death of Equities May be Exaggerated
by Liz Ann Sonders of Charles Schwab,
PIMCO founder Bill Gross believes the "cult of equity is dying" let me take the other side. Mutual-fund flows suggest that we may have lost a generation of investors. However, demographics suggest there may be another generation that could be the stock market's savior.
Dog Days
We now appear to be firmly in the dog days of summer. Low volume and little conviction may dominate but investors need to stay vigilant and now is a good time to prepare for the fall. The recent Fed meeting yielded no new action, but policy makers reiterated that they will act if necessary. We are skeptical that more stimulus measures will have a lasting impact. A waiting game has ensued in Europe as investors look for action following hopeful comments from various officials. But despite concerns over corn prices, central banks will continue to ease, helping to support global growth.
Housing: Good Vibrations
by Liz Ann Sonders of Charles Schwab,
It's time for an update to January's report on housing, and the news continues to get better. Household formations are key. Household formations are moving higher but housing completions aren't keeping pace. Real mortgage rates plunge into negative territory. Key housing market index indicates continued sales (and pricing) recovery.
Treading Water
Stocks seem to be biding time until the action heats back up as summer winds down, but market-moving events can happen at any time. The US economy continues to slow and Bernanke had a relatively dour outlook before Congress. But it appears things would have to get worse before another round of easing is initiated; the effectiveness of which we continue to question. Yields in Spain and Italy indicate action may be needed sooner rather than later, but we did get positive remarks by the ECB, which led to market rallies and a big drop in yields, providing a measure of hope.
Muddling Through, But for How Long?
Equity markets rebounded from their lows, but the move has been less than enthusiastic and convincing. Earnings season is upon us and corporate commentary and outlooks may take the focus away from the macro world, at least for a time. Muddling through is what's occurring in the US economy. But how long before a break is made, both in the economy and the markets? Any progress made at the most recent EU Summit appears to have been short-lived and any credible long-term solutions remain elusive. Additionally, Chinese growth continues to slow and concerns over a "hard landing" are growing.
Jump: Market Rallies Sharply on EU Summit News
by Liz Ann Sonders of Charles Schwab,
Friday's sharp rally on better European news is followed by weaker economic news this week, keeping debate alive about what the market's priced in. When markets expect nothing and get something it can be a recipe for a rally. Investors of every ilk have de-risked, unleashing a scramble last Friday. The US economy is at stall speed, but still looks better than much of the world.
Fat Tails
Stocks have moved modestly higher and may now be in a relatively large trading range. US economic growth remains sluggish and is drifting dangerously close to stall speed. Policymakers in Europe appeared to make some progress in the most recent summit, but much is left to be done and time is running out. Meanwhile, global growth is slowing and central banks are attempting to stem the decline.
Achilles Last Stand: Greeks Vote in Favor of Euro
by Liz Ann Sonders of Charles Schwab,
The June 17 Greek elections favored the pro-bailout party and allow for a likely coalition to be formed probably the least-tumultuous outcome. However, kicking the can further down the road doesn't solve the eurozone's structural problems, nor does it stem contagion. Next on investors' radar is this week's Federal Reserve meeting, where additional easing is expected.
Schwab Market Perspective: Time for Action
With escalated uncertainty, sitting back can be an easy choice, but we believe investors and policymakers alike need to take action. Equities bounced off of what appeared to be oversold conditions but although the US economy appears to be holding its own, a renewed sustainable uptrend may be hard to come by until some substantive policy actions are taken around the globe. The time for decisive action in the eurozone appears to be quickly approaching as short-term solutions are no longer satiating the market.
Our House: Is the United States the Best House in a Bad Neighborhood?
by Liz Ann Sonders of Charles Schwab,
I won't try to put lipstick on the pig that was last Friday's May jobs report, but I will try a little lip gloss. Somewhat lost in the mire of the dire reaction to the report were several other more-positive readings on the economy. That's testament to the likelihood that there are many more drivers to today's malaise than just jobs growth, or lack thereof. It seems clear we're in the midst of the third consecutive mid-year economic slowdown, driven by similar forces, most dominantly the eurozone debt crisis.
It's All Relative
Equities have pulled back and are flirting with correction (-10%) territory. We believed this was a needed process, and remain modestly optimistic that economic data will rebound and the market will eventually resume its move higher over the next several months. The Federal Reserve has made clear that it stands ready to act should the US economy deteriorate, or the European debt crisis escalate, but we remain skeptical. The more important issue in our view is how the coming "fiscal cliff" is addressed.
Month of May: Sell and Go Away, or Hang in There?
by Liz Ann Sonders of Charles Schwab,
We believe the stock market's correction is likely to be less severe this year relative to 2010 or 2011.
Be aware of the possible perils of following a "sell in May" trading strategy.
For now, macro concernsincluding Europe and the looming "fiscal cliff"are trumping better micro news.
Here We Go Again....or Not?
Softer economic data has prompted concerns that the market may be headed for a summer swoonsimilar to the previous two years. We believe the backdrop is decidedly different (and better) this time around but investor and business confidence will continue to be important. Some appear to be hoping for weaker data in order to spur the Fed to enact QE3. We believe the bar is much higher and that the Fed should look to return to a more normal monetary stance. Complicating the overall picture and the Feds job is the coming "fiscal cliff" out of Washington at the end of this year.
Roller Coaster Returns
Despite an earnings season that has been much better than expected so far, investors appear to be again focusing on more macro concerns. Europe and China are dominant concerns but US growth sustainability is also being questioned. We remain optimistic on the ultimate direction of the stock market. The Fed meeting provided no changes but did show a slightly more hawkish tilt in their economic forecasts. Meanwhile, the US government continues to play a dangerous game of chicken as election season is already in high gear and the so-called "fiscal cliff" looms.
One Step Closer: Fed Keeps Rates Low But Gets More Hawkish
by Liz Ann Sonders of Charles Schwab,
The Federal Reserve's Open Market Committee (FOMC) made no change to short-term interest rates, but provided no hints that a third round of quantitative easing (QE3) was in the offing. As usual, the committee repeated its comment about keeping the Fed's balance sheet under review and being willing to act "as appropriate," while also confirming its pledge to keep rates "exceptionally low" through 2014. For the third consecutive meeting, there was one dissenterRichmond Federal Reserve Bank President Jeffrey Lackerwho believes the first increase in rates will be necessary in 2013.
Schwab Market Perspective: Concern or Correction?
Economic data has softened a bit lately but still indicates growth in the US. After a long stretch of relative calm in the markets, we've seen the markets pull back, possibly fulfilling the correction that was overdue. We believe the longer-term trend is higher but near-term risks continue to be elevated and earnings season could bring more volatility. The minutes from the most recent meeting of the Fed seemed to solidify that another round of quantitative easing (QE3) is not in the offing. Although the stock and bond markets initially reacted negatively, we are heartened by the rhetoric.
Comfortably Numb: Have Investors Become Too Complacent?
by Liz Ann Sonders of Charles Schwab,
The market has had its best first-quarter start in 14 years!
But with the rally has come elevated optimism, a contrarian indicator.
The market may be vulnerable in the short term, but we think optimism longer-term remains warranted.
Let's get right to the point: It was the best first quarter for the stock market since 1998. The total return of the S&P 500 index was 12.6% for the quarter; up nearly 30% from the October 3, 2011 low. What was particularly notable about the surge since then has been the attendant plunge in volatility.
Shifting Winds-Turbulence Ahead?
Treasury yields have moved somewhat higher, while stocks have largely continued to rise. Recent correlations appear to be breaking down, which could lead to increased volatility but we remain relatively confident in equities. Perception as to the next moves by the Fed appeared to be shifting, but Bernanke reiterated their easy monetary stance. Uncertainty is rising and the Feds goal of increased clarity through more transparent communication is under scrutiny. Liquidity concerns in Europe have eased but economic risks remain, while Spain and Italy face deal with their ongoing debt crises.
No QE3 Yippee!
by Liz Ann Sonders of Charles Schwab,
The Fed made no major changes to its policy statement and announced a continuation of Operation Twist, but did not hint at or announce further quantitative easing.
The Fed's assessment of the economy did improve somewhat.
Richmond Fed President Lacker's dissent and Dallas Fed President Fisher's pronouncements ring true.
Market Fatigue?
Market action has been relatively muted, notwithstanding the first 1% down day of this year. After the strong run to start the year, another pause or pullback would not be surprising but we continue to believe the upward trend will largely stay intact. Uncertainty abounds as to whether the Fed will unleash a new round of easing but liquidity remains abundant. Rhetoric continues in Washington but any substantial fiscal or tax policy action this year seems unlikely, despite the many challenges that are looming.Europe has stabilized somewhat but risks remain elevated.
Black: Swans and Crude
by Liz Ann Sonders of Charles Schwab,
Economic/financial "black swans" are generally more dire than geopolitical ones.
The Middle East is today's hotbed for potential geopolitical crises.
Oil is taking the brunt of the pressure, but it's not necessarily the death knell for stocks or the economic recovery.
Schwab Market Perspective: Two Steps Forward...
US stocks and economic data appear to be moving at least two steps forward for every step back, which we believe leads to a strengthening trend for bothalthough there are inevitable bumps along the way. We believe the agreement in Washington to extend the payroll tax through 2012 may be the last substantial economic-related agreement before the election, but there are major issues looming. The Fed continues to believe another round of easing may be appropriate, which we think could be dangerous and that they should be looking to move in the other direction.
Missed Opportunities?
Investors eased back into stocks to start the year. This is the start of a sustainable trend, but equities rarely go up in a straight line and near-term caution may be warranted. Another deadline is approaching for Congress and the President to make a deal. Something will get done, but any hopes for substantial action remain dim. Markets appear to be more comfortable with the European debt crisis and the risks associated with it. Central banks around the world are easing, which could help support international stocks in the coming months.
Sunday Bloody Sunday: Hoping For a Giants Win
by Liz Ann Sonders of Charles Schwab,
The "January effect" stock-market indicator bodes well for the rest of year.
A "golden cross" occurrence would also add fuel to the market bulls' fire.
Sentiment looks frothy in the near term, but the "wall of worry" remains intact.
I think the market is vulnerable to a pull-back in the near term, but likely remains in a bull market, with further gains to come. It's also worth noting that February has not been a great month for the stock market historically. But, if the Giants win on Sunday, my mood will improve.
Slow Road to 'Normal?'
Market volatility has fallen and tight correlations have loosened, indicating to us some calming of fears and increased attention on more traditional economic and earnings-related news. This is a good sign for stocks in the foreseeable future. The Fed unveiled its new communication strategy after its most recent meeting, reiterating that interest rates will likely remain extremely low for some time. The European picture is brightening slightly and there may be a glimmer of hope for stock market investors. After a soft patch, global growth may be turning around.
Journey to the Center of the (Fed's) Mind
by Liz Ann Sonders of Charles Schwab,
The Federal Reserve opted to keep short-term interest rates on the floor and extended the period of time during which rates are likely to remain near zero.
Newly published forecasts show slightly better growth, a bit less inflation and a lower unemployment rate.
Fed Chairman Ben Bernanke got hit with a lot of questions about the risks of extending zero-rate policy for 2 more years.
Rock Bottom: Housing May Have Already Hit It
by Liz Ann Sonders of Charles Schwab,
A comprehensive (read: long) and chart-filled update on housing suggests the bottom may largely be in. Pricing may have more downside and real mortgage rates need to decline further, but most other metrics are flashing green. New themes: housing becoming "local" again, and for now, renting is trumping buying.
Time to Climb?
The US economy continues to expand and has recently picked up momentum. Investors have been focused on European and US debt problems, but that may set up an environment for stocks to move higher. Many challenges await Congress. We're not optimistic that much progress will be made, but the rhetoric will almost certainly heat up as late-year elections loom. Recent policy decisions in Europe provide some hope but the region's banks continue to struggle and are pulling back on lending, which likely impedes growth. In China, policymakers attempt to keep growth from dipping below healthy levels.
True Reflections on 2011 and 2012
by Liz Ann Sonders of Charles Schwab,
The Dow Jones Industrial Average (DJIA) managed a gain for the year in 2011, but very few investors were cheering.
With inflation settling down, the upward boost to real gross domestic product (GDP) is likely being underestimated.
Although the eurozone crisis may keep volatility elevated short-term, 2012 is looking like a better year.
Remarkable Resilience
Despite a remarkable series of crises, the stock market was roughly flat on the year. Earnings increasing, inflation decreasing, and economic data improving, the environment for a renewed upward move may be in place to start 2012. There seems to be little hope from DC for any relief in the near term, but 2012 brings an election cycle that will likely have a major impact on the future of the US. A near-term implosion in Europe seems to have been avoided but real solutions remain absent and the risks for a greater economic pullback are growing, which would likely have global implications.
Early Santa Arrival?
Stocks have continued their seesaw pattern around developments in the European debt crisis. The major indices remain in the wide range we've been in for the last two years. Factors are setting up for a potential break above that range in the coming year. Expectations about progress in Washington are extremely low and near-term the biggest issues are the proposed extensions of the payroll tax cut and unemployment insurance. The increasing populist rhetoric is not helpful and any chance of major debt-reducing legislation occurring before the 2012 election seems remote.
Fed Ends 2011 with a Whimper
by Liz Ann Sonders of Charles Schwab,
There were no surprises out of the Fed meeting today, with short-term interest rates remaining pegged at zero. There was one dissenting FOMC member who wished for additional policy accommodation. Much of the Fed's near-term focus remains on the eurozone debt crisis.
Schwab Market Perspective: Short-term PainLong-term Gain?
Markets have been under pressure as the crisis in Europe has recently intensified, providing the impetus for more aggressive action and an eventual resolution, including this week's coordinated central bank actions. Economic data in the United States continues to be largely better than expected. The supercommittee failed to come to a deficit reduction agreement. While markets expressed initial disappointment, their failure may end up being beneficial as it forces spending restraint. As the euro crisis has deepened, some steps have been taken but mostly address liquidity, not solvency.
Deja Vu? Eurozone Crisis Today vs. 2008 Subprime Crisis
by Liz Ann Sonders of Charles Schwab,
News flow on the eurozone debt crisis is speedy, and the latest news of a fiscal pact brings cheers by stock investors for now.
There are many similarities between the 2011 and 2008 crisesbut even more differences.
The end of the "Debt Supercycle" has ushered in a period of heightened risk and shortened economic/market cycles.
Every Picture Tells a Story: Market Charts Looking Good
by Liz Ann Sonders of Charles Schwab,
With so much focus on the macro, I thought an update on the micro would be welcome.
Several measures of sentiment, valuation and technical conditions show the market to be in pretty good shape.
Macro headwinds persist, but the expectations bar has arguably been set low enough to be easily hurdled.
Born in the USA: A Look at What Could Go Right
by Liz Ann Sonders of Charles Schwab,
The expectations bar has probably been set low enough to be easily hurdled as the big market rally may be indicating.
Not only is recession risk fading in the near term, a very positive longer-term story is emerging, even though very few are in tune (yet).
Investors have gotten used to digesting worst-case scenarios maybe it's time to ask what could go right.
Missing the Forest for the Trees?
Earnings season was good and economic data in the US has improved. Robust growth is unlikely in the near future, but the economy is improving. Investors appear to be unconvinced that the picture may be brightening. Inflation continues to run higher than we'd like to see but sustainable price gains are unlikely. The Fed continues to be extremely accommodating. Italy has the potential to be a much bigger problem than Greece. A tentative agreement has been reached for Europe, but hopes for a true long-term solution remain thin. China is likely to suffer no worse than a soft landing.
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