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No Manipulation of US Jobs Data, but the Numbers Are Noisy
by Joseph Carson of AllianceBernstein,
In the heat of a US election season, the sharp drop in September's unemployment rate raised some eyebrows. I think it is blatantly wrong to argue that government statisticians manipulated the data. But the jump in household jobs that triggered the drop in the unemployment rate was indeed extraordinary and requires further scrutiny.
Euro-Area Interest Rates: To Zero and Beyond?
by Darren Williams of AllianceBernstein,
There has been some speculation that the European Central Bank (ECB) may soon push its deposit rate into negative territory. We think a cut in the deposit rate would be a poor substitute for measures aimed directly at repairing the monetary transmission mechanism in the troubled peripheral countries. But there's a case for reducing the deposit rate, and one which we think is worth rehearsing.
If Its All About Macro These Days, Why Havent EM Stocks Done Well?
by Morgan Harting of AllianceBernstein,
It doesn't seem to make sense. Superior macroeconomic fundamentals in emerging countries have not led to stronger-or even positive-equity returns over the last two years. Since the beginning of 2011, the unhedged return in US dollars of the MSCI Emerging Markets (EM) Index has been (10)%, while the MSCI World Index has delivered 6.5%. What's going on?
How Can Balanced Investors Mitigate Their Equity Risk?
by Daniel Loewy of AllianceBernstein,
Over the past three decades, bonds have provided balanced investors with the best of both worlds. As 10-year Treasury yields fell from a high of 13.7% in 1980 to less than 2% today, bonds provided both strong returns and a great cushion in times when equities were weak. Bonds are still important, but investors shouldn't expect more of the same.
Will Solar Ever Reach "Grid Parity"?
by Catherine Wood of AllianceBernstein,
The coming of grid parity keeps receding into the distance like a desert mirage. Over the last six years, executives at solar energy firms and their consultants have projected repeatedly that solar energy will reach grid paritybecome cost competitive with other power sourcesin three to five yearsonly to push its expected time of arrival further into the future. My colleague Brett Winton explains why.
Do TIPS Pose a Hidden Risk to Seekers of Inflation Protection?
by Douglas Peebles of AllianceBernstein,
Treasury-inflation protected securities, or TIPS, have been a popular choice for investors concerned about future inflation. And TIPS' returns have been impressive in recent years. But the main contributor to TIPS' performance isn't inflation. It's an ingredient that could become as hurtful down the road as it's been helpful in the past.
Does an Odd Economic Tidbit Reveal Surging Optimism?
by Joseph Carson of AllianceBernstein,
The Philadelphia Fed Index, a leading measure of US economic activity, beat analysts' expectations. But what caught our eyeand many others' as wellwas a detail within the survey: the future index jumped more sharply than it has since February 1991, when the first Gulf War ended unexpectedly quickly. The Philly Fed Index, released this morning, declined at a rate of 1.9 in September, compared to its 7.1 rate of decline in August.
Afraid of QE3? Buy Real Assets
by Seth J. Masters of AllianceBernstein,
We expect to see continued asset-buying announcements from central banks around the world: the ECB last month, the Fed today, the Bank of Japan imminently. The impact of these announcements, and ensuing implementations on the real economy, are likely to be ambiguous at best. However, our research suggests that real assets such as real estate and commodities will profit from asset purchases in the near term and protect from related inflationary risks in the medium term.
Weaker Growth Helps Shift Germanys Approach to Sovereign-Debt Crisis
by Darren Williams of AllianceBernstein,
Recent German data show clearly that the sovereign-debt crisis is starting to bite. This might help explain why the government has given a green light to the European Central Banks (ECBs) new sovereign-bond purchase program. It may also indicate a more lenient approach to Greeceat least for the time being.
How Would Municipals Fare Under Romney?
by Douglas Peebles of AllianceBernstein,
Last month, we wrote that changes to the tax code being discussed in Washington would affect the value of municipal bonds. While that analysis still holds true, that was before the election campaign engines really revved up. Now there's more chatter, if not more clarity. My colleague Michael Brooks weighs in.
Policymakers Powerless to Stem Capital Flight from Spain
by Darren Williams of AllianceBernstein,
Capital flight from Spain is accelerating. As foreign investors and banks pull massive sums out of the country, policymakers look powerless to stop it. So far this year, there has been a net capital outflow from Spain of 220 billion. We can identify three main channels: foreign investors sold 84 billion of Spanish securities; foreign banks withdrew 91 billion of loans or deposits from Spain; and banks located in Spain shifted 61 billion of deposits abroad.
Challenges in Todays Municipal Market
by Douglas Peebles of AllianceBernstein,
Most fixed-income investments carry two key risks: interest-rate risk and credit risk. Both affect a bond's value in the market. But before the 2008 financial crisis, interest-rate risk was the primary concern of many investors and investment managerscredit risk was much less of a consideration. My colleague Michael Brooks explains why.
Fiscal Cliff Adds Urgency to US Election Budget Showdown
by Joseph Carson of AllianceBernstein,
With a record tax increase on tap for January 1, 2013, there has never been a better time for Washington to have a serious debate about fiscal policy. Before the economy reaches the so-called fiscal cliff, when huge tax increases and spending cuts are scheduled to take effect, US voters will have the opportunity to make a clear choice between two fiscal visions in the November elections.
Is a Japan-Style "Lost Decade" Ahead for the US?
by Sharon Fay of AllianceBernstein,
The laborious pace of the US recovery has inevitably fostered comparisons with Japan. But we find several reasons why a protracted slump like Japan's is unlikely, as my colleague Gerry Paul argues. After five years of tepid growth, investors can be forgiven for wondering if the US is headed for a decades-long slump like Japan's.
Stocks and Bonds: Comparing the Range of Potential Outcomes
by Seth Masters of AllianceBernstein,
Investors fleeing stocks have mostly sought shelter in bonds. That's understandable, given their relative stability and reliable income. But it's important to compare long-term expected returns, too. While bonds can be volatile in the short term, over longer time horizons, expected returns for bonds are easy to project: they are close to the starting yield, and the range of possible outcomes is narrow. Today, yields are extraordinarily low.
What Works in Tough Equity Markets?
by Sharon Fay of AllianceBernstein,
During the market crisis of 20082011, traditional equity style strategies such as value and growth underperformed the markets, often by wide margins. But our research shows that there was a way to diminish the negative impact of market turmoil on portfolio returns. In a recent study, we found that in volatile markets, stocks performed relatively well if they had at least one of the following characteristics.
The Fundamental Case for the 20,000 Dow
by Seth Masters of AllianceBernstein,
While some people deem stocks expensive relative to 10-year trailing earnings, we take a forward-looking approach. It starts with the premise that the stock market is not a casino and stock prices are not pulled out of thin air: they reflect the intrinsic value of companies' future earnings.
Could Tax Reform Hurt Municipal Bond Prices?
by Douglas Peebles of AllianceBernstein,
The "Bush tax cuts" are set to expire at the end of this year. At the same time, the annual federal budget deficit is unsustainably high and must be addressed. Of course, strong economic growth would help policymakers fix our budget shortfall, but that doesn't appear to be in the offing. The eventual solution may affect the value of municipal bonds, and that impact could be either positive or negative.
Are Stocks Too Expensive Now?
by Seth Masters of AllianceBernstein,
Not in our view. Although we recognize that the US and global economies continue to be scarred by the credit crunch that began in 2008, we think stock prices already discount the risks. Investors today have good reason to worry about stocks. Europe, the US and emerging markets are facing real problems todayand economic recoveries after financial crises almost always take longer than recoveries after ordinary downturns.
Note to Bond King: Check Your Math
by Seth Masters of AllianceBernstein,
The Wall Street Journal published an article on August 1 headlined: "Bill Gross: Equities are Dead." In fairness to Gross, what he actually wrote in his August "Investment Outlook" was, "the cult of equities is dying." We agree with most of Gross's argumentbut not with his unsupported forecast of extremely low stock returns. Let's take a look at Gross's claims...
What History Suggests About the Future of Stocks
by Seth Masters of AllianceBernstein,
Some experts today argue that the world has entered a New Normal condition in which stocks have permanently lost their return edge. We've heard this before. It was wrong then, and we think it's wrong now, too. In 1979, BusinessWeek published a cover story famously called The Death of Equities. now, stock market returns had lagged 10-year Treasury returns for a decade, although for somewhat different reasons.
Are Investors Worried About the Right Risk?
by Seth Masters of AllianceBernstein,
Individual and institutional investors alike have been shifting their capital from stocks to cash and bonds at a rapid rate in recent years, despite extraordinarily low interest rates. But if investors stop to weigh the importance of two different types of risk, they'll see they still need stocks. We think that 10 years from now, investors who don't will wish they had stayed in stocks or added to them
Global Bonds: Protection in Down Markets
by Douglas Peebles of AllianceBernstein,
As US Treasury yields continue to plumb record lows, some have quipped that government bonds have gone from offering risk-free returns to return-free risk. Indeed, when interest rates inevitably rise from their current levels, bondholders face the prospect of poor or even negative returns. One way for investors to mitigate such a risk is by globally diversifying their bond holdings.
Variable Annuities Gain New Respect in Crisis Aftermath
by Michael Hart of AllianceBernstein,
The 2008 market crash has given variable annuities (VAs) a new lease on life. As clients search for ways to rebuild retirement nest eggs with less downside risk, US financial advisors are increasingly prescribing VAs as part of the solution. These were some of the key findings of a recent AllianceBernstein survey of more than 500 financial advisors to learn more about how and why they use VAs in their practices.
What's Behind the Risk-On/Risk-Off US Economy?
by Joseph Carson of AllianceBernstein,
The US economic recovery is progressing in fits and starts. Short-lived risk-on periods, when companies and consumers invest more, seem to constantly give way to risk-off periods, with anxiety and fear restraining economic activity. I think the choppy growth trends may have been triggered by a big change to business behavior since the financial crisis of 2008.
Greece Gains Some Breathing Space
by Darren Williams of AllianceBernstein,
Today, New Democracy (ND) leader Antonis Samaras will try to form a government. If he succeeds, an immediate disaster scenario will have been avoided. The question is: for how long? Yesterday, the centre-right ND party narrowly defeated the radical left wing Syriza party in the second Greek election. A coalition between ND and the center-left Pasok party would command enough seats in parliament to give it a small working majority (a target that the two parties just missed in the May election).
A Credible Recapitalization of Spanish Bank Is Now Imperative
by Darren Williams of AllianceBernstein,
A credible recapitalization of the Spanish banks is now a necessary, though not sufficient, condition to stabilize markets. But there is disagreement about how to achieve thisincreasing the risk of a damaging standoff and further volatility in European sovereign-debt markets.Spain was always going to be a key battleground in the sovereign-debt crisis. At 1.1 trillion, Spains economy accounts for 11% of euro-area output. It is almost twice as big as the combined economies of Greece, Portugal and Ireland. More pertinently, it has total banking assets of 3.7 trillion.
Selling Your Business Before Taxes Rise
by Daniel Eagan of AllianceBernstein,
Planning to sell your business? Try to wrap up the deal before year end, when todays highly favorable US capital gains tax rate is scheduled to expire. The federal long-term capital gains tax rate now tops off at 15%. If Congress does not act, on January 1, 2013, it will shoot up to 23.8%, including a 3.8% healthcare surcharge for individuals with incomes over $200,000.
What Weve Learned from Municipal Distress
Is the municipal bond market on the verge of collapse? You might think so, given the blaring headlines about a few big disasters in the last year. But as my colleague Joe Rosenblum explains below, poor decision making, not systemic issues, has caused the most serious problems. There is no question that state and local governments are facing financial hardship as a result of the weak economic recovery and its impact on tax receipts. But this is not the first time local governments have been challenged or have defaulted on their debt or filed for bankruptcy protection.
Rules of the Game Have Changed for Euro High-Yield Investors
Although we think financials will be a potential driver of volatility of high-yield returns in the coming year, were not suggesting that investors should shun the sector altogether. Its true that, in some cases, the expected returns may be outweighed by both systemic and idiosyncratic risks. For example, we might have a negative outlook on both a financial institution and the country in which it is domiciled. But in many cases, levels of country and idiosyncratic risk may be acceptable.
The Bigger Picture on US Jobs
Job growth slowed in March and April from a robust pace early in the year. People also appear to be leaving the labor force. Both trends suggest that the US economy may be losing momentum. However, I think preliminary employment figures dont tell the whole story and that you really need to wait for revisions to get a more accurate picture of underlying trends. In April, payroll employment rose by 115,000. That fell short of the consensus estimate of 150,000 and was the smallest jobs gain since August 2011. But initial payroll estimates are based on only a sample of business establishments.
Dont Paint Yourself into a Corner with Overly Defensive Strategies
by Vadim Zlotnikov of AllianceBernstein,
Popular strategies for hedging against deflation and hyperinflation are likely to be disastrous if the economic outlook grows more benign as we expect. With the economic and policy outlook still uncertain, investors fear two contradictory but equally negative possible outcomes: deflation/deleveraging on the one hand and hyperinflation/currency devaluations on the other. As a result, instruments that can deliver protection in one or the other of these scenarios have enjoyed substantial inflows. Many investors have snapped up Treasuries, REITs and high-dividend-yielding stocks for insulation.
Euro-Area Imbalances: Is Germany Part of the Problem?
by Darren Williams of AllianceBernstein,
The stagnation of consumer spending and the weakness of wage growth in Germany over the past decade deprived Greece and other peripheral European countries of their most important trading partner. Expansionary German policies could help correct imbalances in the euro area, and remove the need for bailouts.
Will Productivity Gains Sustain US Economic Recovery if Employment Remains Subdued?
Productivity gains have exceeded real GDP growth by 3 percentage points during the economic recovery as companies have slashed payrolls and other costs. These productivity gains are critical to overall economic performance, including profitability and standard of living improvements, and will offset any risk of weak employment.
Greek Financial Woes Escalate but Default or Euro Departure is Still Unlikely
by Darren Williams of AllianceBernstein,
The sell off in Greece this week has taught the country a tough lesson in the urgency of getting its debt under control. Although several risks remain and Greece may eventually require outside support, we believe it will not be allowed to fail, largely because of the risk of contagion to other weak euro-area countries.
Historic Turn in Financial Balance of US Private Sector Limits Damage from Public Debt Binge
The private sector financial balance moved into surplus in 2009, as households and companies saved more and invested less. In our view, the unprecedented shift in the balance of private sector saving and investment suggests that the US recovery is on a stronger footing for a sustainable recovery in early 2010.
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