10/09/12: After Columbus Day we take a “look ahead” at a few items that we will be tracking carefully. 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.
Leading off Monday, U.S. bond markets were closed but stock markets are open for Columbus Day. Today is busy both domestically and internationally with three key events: (1) The International Monetary Fund (IMF) and the World Bank begin their meetings in Tokyo, (2) German Chancellor Angela Merkel visits Greece and (3) third-quarter earnings season kicks off in the United States. On Wednesday, the Federal Reserve issues its beige book report on regional economic conditions around the country. Thursday brings data on the U.S. international trade balance for August along with September jobless claims. The market week ends Friday on more of a “consumer theme,” with producer prices for September being released along with publication of The University of Michigan’s preliminary reading of consumer sentiment for October.
What does this mean for investors?
As a reminder, U.S. markets are primarily driven by the consumer. As a matter of fact, 70% of GDP is produced in that way, as opposed to 30% from manufacturing and other businesses. How confident consumers are feeling, both about their personal net worth (where real estate value is most often the major component) and how much they can spend is the real “driver” of the market in this country. It will be interesting to see whether the gradually improving consumer/housing dynamic will mute what could be the impact from a lackluster earnings season.
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On the domestic front, we will be watching “earnings week” very closely beginning today.
For the first time in 11 quarters, companies in the S&P 500 stock index are likely to show a decline in profits overall. However, on the “macro” side of things, the Federal Reserve has given us another round of quantitative easing and, in general, U.S. consumer and housing data are improving. Estimates from S&P Capital IQ call for a 1.34% overall earnings decline versus a 0.8% increase in the second quarter. Clearly, third-quarter earnings forecasts have been steadily reduced over the past three months.
What does this mean for investors?
This will be an interesting study in market movements this week, as a clear “tug-of-war” will occur with weaker corporate earnings on one side and improving consumer data (and the recent Fed action) on the other. Declines in manufacturing earnings potentially could be a problem; however, they represent only 15%-20% of the total. The key question is: “Do these earnings numbers signal the beginning of a prolonged deterioration of company results, and will this dynamic overwhelm the improving consumer trends?”
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On the international front, the IMF and World Bank begin their meetings in Tokyo.
Finance ministers from 188 nations are meeting this week in an attempt to resolve the two major threats to the global economy: (1) the impending U.S. “fiscal cliff,” and (2) the recent “flare up” in the European debt crisis. The combined economies of the United States and the Euro Zone represent 40% of the world’s economic output. In addition, emerging markets are slowing down and unrest in the Middle East has elevated. Obama officials will probably inform the assembly that the U.S. budget concerns will be addressed after the presidential election. Likewise, the European Central Bank’s latest attempt to save the euro had eased turmoil momentarily, but the realization that tough execution problems still exist are increasing worries.
What does this mean for investors?
That governments are engaged in markets more than ever before. The savvy investor must be highly alert to the macroeconomic forces (Fed easing, ECB action, etc.) that continue to dominate this year’s market cycle. The problem is that these government actions are the least predictable and accelerate market volatility significantly for the “main street” investor.
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Current protests against Spanish banks are the most recent example that a “final solution” for the European debt crisis is a long way off.
Another week, another country, another issue for Europe. As many as 700,000 bank customers in Spain placed money, in some cases their life savings, into high-yielding preferred shares and subordinated bonds issued by their banks. When the economic downturn hit Spain hard, the securities dropped precipitously in value, making it virtually impossible to resell them. Many Spanish bank customers maintain that their banks assured them that the securities were as safe as regular deposits. Some banks offered clients the option to swap preferred shares for deposits or common shares, but the European Union vetoed that as a condition for lending money to support the Spanish banking system. Just when the Spanish economy could really use many of these customers spending money, they don’t have it.
What does this mean for investors?
Getting the economy “back on track” in Europe is a long-term problem of both philosophy and execution. Primarily in “peripheral Europe,” (Spain, Italy, Greece, etc.) there still is considerable work to do. To that end, we are watching carefully the results of German Chancellor Angela Merkel’s trip to Greece this week.
Well, that’s our focus for the week. Should you have any questions about your investments or strategy, feel free to 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.
