Economic Conditions Are More Robust Than a Year Ago And…

Meeting5/23/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

Concerns out of Europe, especially in Italy and Greece, weighed on equity markets this morning.  Italy’s outlook was lowered by S&P from “stable” to “negative,” citing fears over the country’s poor growth outlook and debt burden.  The Italian government announced they will unveil deficit-cutting measures aimed at balancing the budget in 2014.  Greek Prime Minister George Papandreou continued to echo the sentiments of a number of ECB officials, flat-out rejecting any talks of debt restructuring.  Commodities are mixed this morning, as most key agriculture prices and industrial commodities are lower.  On the other hand, precious metals, benefiting from a safe haven perspective, are holding firm.

Looking back at Friday, U.S. equities finished lower, hurt by disappointing retail headlines and worries over European debt.  Financials, Industrials and Basic Materials were the key laggards for the day, while Energy and Consumer Staples were the leaders.  In other markets, energy rebounded with oil approaching $100 per barrel after the discovery of a past Al Qaeda plot involving supertankers.  Treasuries also rose on Friday, approaching 2011 lows.  Energy was the best performing sector on the week, while Technology and Industrials were the worst.

Around our financial planning firm this morning, we were discussing three items that we thought would be of particular interest to our readers:

The Markets Broken Down:

  1. Treasury yields are lower this morning as ongoing concerns over European sovereign debt are driving risk aversion. On the same day that Fitch downgraded Greece’s credit rating to B+, S&P placed Italy’s rating on negative outlook, citing concerns about its growth prospects and ability to meet deficit reduction targets.  In response, Italy’s Treasury pledged to continue to take steps necessary to meeting its goal of a balanced budget by 2014.  The benchmark 10-year Treasury note yield fell 5 basis points this morning to 3.1%, its lowest level of the year.
  2. While European debt problems have once again intensified, economic conditions are more robust in the United States than a year ago and better able to withstand any pressures. First, a year ago as the soft spot emerged, the economy had shed jobs during 10 of the prior 12 months, whereas this year new jobs have been added in every one of the past twelve months totaling 1.7 million.  Second, deflation was a major concern of policy makers a year ago with the year-over-year change in the Consumer Price Index sliding to 1.1% by June, whereas now (in sharp contrast) the CPI is now in line with the 30-year average of 3.2%.  Third, in the spring of last year, business lending was falling at a 20% year-over-year pace as businesses were unwilling to borrow and bank credit standards were tight.  Today, commercial and industrial loan demand has turned positive as businesses seek to fund growth and banks have eased standards.
  3. Is the slowdown in the key Chicago Manufacturing Index weather related, a fluke, or a sign of something deeper? The growth rate of manufacturing data has slowed in recent months, as it usually does at this point in an economic recovery.  Some of the slowdown may be related to supply disruptions, weather and the late Easter, but on balance, the slowdown is related to where we are in the economic cycle.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
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.

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