How Robust a Recovery Can Be Expected?

Economy Brewer6/06/11: 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.

U.S. stocks opened down marginally this morning amid persistent growth concerns.  With a quiet week of economic data following last Friday’s flurry, and a lull in earnings news, the market’s attention will be focused on Europe and geopolitical developments around the world in coming days.  Overseas, European and Asian markets were broadly lower overnight.  Banks dragged European averages down as regulators battle over capital requirements.  Japan’s Nikkei closed at an 11-week low in response to Friday’s weak U.S. jobs report and on bankruptcy fears of a major power provider in that nation whose shares tumbled 30%.  Most key commodities are lower this morning amid a firm dollar, though precious metals are higher on support from safe-haven bids and copper is up slightly.  U.S. crude dipped below $100 ahead of a key OPEC meeting.

Looking back at Friday, stocks sealed their fifth straight weekly decline.  However, already low expectations, reported progress on Greece’s bailout and a better-than-expected ISM services number helped limit Friday’s losses.  Stable oil prices and strength in service stocks helped Energy finish flat, while the rest of the S&P sectors lost between 0.7% and 1.7%.  The broad commodities indexes were flat as higher metals and agriculture prices were offset by energy weakness amid a weaker dollar.  After losing about 2% last week, the S&P 500 has halved its previous 9% 2011 gain achieved on April 29th.

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

  1. How robust a recovery can be expected in the face of slow job growth and the continued malaise in the housing market? At first glance, it would seem that these factors would dictate a below-average growth environment.  However, while they may be hard to see at the moment, there are potential positives that could result in stronger growth.  Among them are: (1) a resolution of the U.S. debt problems and a clear path to fiscal stability that could emerge, (2) new technologies that greatly improve resource productivity, and (3) an emergence of the Chinese consumer as a “driver” of demand growth rather than merely supply.
  2. A quiet week for economic reports pushes policy (at home and abroad) to the front burner. The week after the release of the monthly jobs report (released Friday, June 3rd) is typically a quiet one for economic data, and this week fits that pattern.  Other than the usual weekly readings on retail sales, initial claims for unemployment insurance and mortgage applications, there are no market-moving economic reports due out in the United States this week.  The data that is due out – trade deficit and wholesale sales and inventories is both “old” (for April) and considered second-tier by market participants.  The lack of a robust calendar of U.S. economic data this week will force markets to focus on policy and overseas events.  The Federal Reserve will release its Beige Book this week, a qualitative assessment of economic and business conditions in each of the 12 regional Federal Reserve districts.  Internationally, markets remain vigilant for another rate hike in China as Chinese authorities are expected to release a few of China’s economic indicators for May.
  3. Could reconstruction in Japan (earthquake, tsunami) and the United States (hurricanes, tornados) be a boost to GDP? There is pretty convincing evidence that the Japanese earthquake (and its aftermath) along with unusually severe weather in the United States has exacerbated the weakness in the U.S. economic data in recent weeks, although not all of the weakness can be attributed to these factors.  Looking ahead, as the weather returns to normal, and Japan moves from recovery to rebuilding, the U.S. and global economy should benefit.
  4. Treasuries rallied on Friday’s disappointing non-farm payrolls data, as yields declined by 3-4 basis points across the curve. Yields are slightly higher this morning as the market sets up for this week’s 3-, 10-, and 30-year Treasury auctions.  European officials approved the fifth installment of Greece’s $110 billion euro aid package after determining the country has made progress in meeting budget deficit reduction targets.

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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