Financial Markets Outlook: Federal Reserve, China and Stress Tests

Ashley Page, Senior Vice President, Wealth Consultant03/05/12: It’s hard to believe that we are already doing our first financial markets update blog for the month of March, as it seems in many ways that 2012 just started. In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s our opinion on four major decisions that could have impact on markets and investors this week:

1. First, here’s a “week-in-a-glance” view of what’s coming up in the next five days. Today starts with a domestic data bent, as numbers for January factory orders are scheduled and the Institute for Supply Management issues its non-manufacturing index. Tuesday is “all politics,” as the Republican Party holds Super Tuesday nominating contests in 10 states. Wednesday brings a “wide mix” domestically with the ADP national employment report on tap along with data on consumer credit for January and The Labor Department’s release of fourth-quarter nonfarm business productivity and costs. Internationally on Wednesday, the Arab states begin two days of meetings in Cairo and The Bank of England meets on monetary policy. Thursday is also a domestic/international combination of market drivers, as data on initial jobless claims are released in the U.S. and The European Central Bank’s governing council meets to set interest rates for the euro zone. The market week concludes Friday with The Labor Department’s survey of last month’s employment status and the release of U.S. international trade figures.

What does this mean for investors? Primarily, U.S. domestic data is “front and center” with a combination of employment, manufacturing, consumer and credit data. 70% of the economy in the United States is driven by the consumer, so how this group is faring, particularly in the employment numbers, will have significant market ramifications.

Financial Market Outlook

2. It appears that the Federal Reserve is becoming more optimistic. A very interesting article in the Wall Street Journal this morning suggests that the Fed is likely to emerge from next week’s policy meeting with a slightly more upbeat view of the economy in 2012. The fast decline in unemployment has taken Fed officials by surprise, as normally this level of unemployment decrease is coupled with more robust economic growth than we are currently seeing. Across the country, a significantly larger number of metro areas are seeing unemployment drop than this time last year.

What does this mean for investors? We think probably two things. First, that the Fed will “take off of the table,” for now, any further stimulus in the form of additional long-term bond buying. In other words, no QE3. Second, if the unemployment trends continue to hold, this gives a much broader base to improving consumer confidence, and with it, solid market performance.

3. We are increasingly focused on China. China has lowered its GDP target to 7.5% from the 8% goal that’s been in place since 2005. Premier Wen Jiabao, speaking at the annual meeting of the National People’s Congress, called for the nation to shift to a more sustainable and efficient economic model. China’s service economy contracted in February as well. Practically, China will begin to lessen its reliance on exports and capital spending in favor of increased domestic consumption.

What does this mean for investors? Not to state the obvious, but this nation will probably have as much to do with how markets perform in the next few years as anyone. Government involvement in the economy has always led to “distortions” in their economic data, but our fascination is what this economy will “really do,” and what market impact will it “really have,” if fully unleashed.

4. Major lenders in the United States are worried about how much detail the Federal Reserve will release about their latest “stress tests.” The 19 largest U.S. banks in January submitted significant quantities of performance data in response to regulators’ questions. The primary focus? How would these banks perform in a pronounced economic slowdown. Citing competitive concerns, bankers are pressuring the Fed to limit its release of information, where the Fed wants to publish the widest array of data since the financial crisis. This is yet one more example of how the Fed’s role has “quietly” gotten more expansive than just your “garden variety” emphasis on monetary policy in years past.

What does this mean for investors? If the major banks appear poorly prepared for an economic downturn from a wide array of released data, markets could become more jittery. However, if the Fed is too “soft” on the release of the data, it could also make markets nervous, as the stress tests will appear to fall short of their basic confidence-building mandate after the financial crisis of 2008.

Do you have questions or concerns about your investments. I would enjoy talking with you. Email me here 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.

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