10/22/12: Let’s start the week off by “looking ahead” at a few items that we will be tracking carefully in the financial markets this week. These are items that we feel anyone investing in the markets should be aware. These are just a few opinions that we have, and as with life, nothing is certain about them.
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First of all, here’s a “week-at-a-glance” view of what’s coming up over the next five market days.
Beginning tonight, President Barack Obama and Republican challenger Mitt Romney meet for their final debate with the subject being foreign policy. Tuesday brings the start of a two day meeting by the Federal Reserve Open Market Committee to set interest rates, which will be announced on Wednesday. Mid-week also provides us with data on September’s new home sales. Figures on durable goods orders for September are expected on Thursday and the market week ends Friday with the release of The University of Michigan’s consumer sentiment index.
What does this mean for investors?
For the third week in a row, we have a market “tug of war” going on between the negative impact of lackluster corporate earnings and the possibility of increasingly upbeat attitudes from the American consumer. Which of these forces will prove to be more “market moving”?
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Overall, Americans continue to feel better about the health of the U.S economy.
In a Wall Street Journal/NBC News poll conducted last week, 45% of registered voters said they expect the economy to get better over the next 12 months. Only 9% said they expect the economy to get worse in the coming year, the smallest fraction since 1993. Surveys of consumers of all sorts, including the closely monitored University of Michigan and Conference Board reports, have been finding sentiment about the economy improving. Interestingly, this is occurring at a time when economic forecasters see painfully slow growth ahead even if the U.S. avoids the “fiscal cliff.”
What does this mean for investors?
Having the consumer “back in the game” would really help markets going forward. U.S. GDP is 70% consumer and 30% manufacturing and government, so people spending more money is a powerful impact. Our suspicion is that this is going “hand in hand” with a gradually improving housing market, with people feeling “wealthier” as their home values gradually recover. Not surprisingly, consumers surveyed in the WSJ poll “overwhelmingly” wanted both the Democrats and Republicans to find compromise and avoid the “fiscal cliff.”
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In an interesting market phenomenon, increasing funds flows are once again moving towards emerging markets.
Actions by central banks around the world towards historically low interest rates have, overall, gotten market risk aversion to come down. Simply put, investors just don’t have the “safety” anymore of CDs and money markets paying returns that are meaningful. With the European debt crisis grinding on, the first resulting “wave” was a larger funds flow towards U.S. equities in order to elevate yield. The second “wave” of funds is now moving into markets that have lagged behind the U.S. for a number of years (South Korea and Argentina are examples). Such a shift has its risks, of course, as emerging markets are notoriously volatile. So far this year, global investors have poured a net $23 billion into emerging market stock funds as opposed to last year when they extracted $34 billion from them.
What does this mean for investors?
If you don’t think that government policy makers can have impact on markets, we offer this powerful example as Exhibit A. The global flattening of yield curves has clearly had a major impact on how market participants are behaving. The important thing to remember is that this is truly a global economy now and that we are in the midst of a world-wide slowdown. This is bound to have impact on emerging markets at some point as well.
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In our installment of “Around The World in 80 Seconds,” here are some international events that we are watching closely this week for their potential market impacts on the United States.
First, Japan’s economy, viewed through the lens of export volume, is clearly not doing well. As a matter of fact, the country recorded a trade deficit that was its first September shortfall since 1979. Due to politically driven tensions concerning the East China Sea islands, exports to China were down 14.1% while sales to the EU collapsed 21.1%. Even though the drops are for different reasons, this shows what kind of economic impact that a “one-two” punch from Europe and China together can have on an industrialized nation.
Second, Germany’s economy probably expanded in Q3 despite overall Eurozone contraction. This result was actually driven (not surprisingly) by imports outside the EU. Finally, recent regional elections in Spain are actually promising overall. Specifically, Spanish Prime Minister Mariano Rajoy has been helped by a regional election win in his home province of Galicia. These results will probably make it easier for Rajoy to implement more austerity and make a request for aid for Spain in a “controlled” way.
What does this mean for investors?
In order to protect themselves, investors need to evaluate international risk factors more than ever before as to their impacts on U.S. markets. Where many years ago such events might be an “afterthought” to the U.S. investor, they are clearly as “front and center” as they ever have been. Further, the “shrinking” of the world through faster and better communications is leveraging these impacts on American markets as never before.
It should be an interesting week. If you have any questions, please send me your comments below or call me at (205) 989-3498.
Ashley Page
Senior Vice President
Wealth Consultant
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
