08/27/12:As we head towards Labor Day, football and the “unofficial” end of summer, let’s 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.
-
First of all, here’s a “week-at-a-glance” view of what’s coming up over the next five market days.
Monday should be a relatively “quiet” day, without much coming out in the way of economic data either in the United States or Europe. Tuesday brings release of The S&P/Case-Shiller home-price index and The Conference Board’s data on consumer confidence. Wednesday is very busy for markets, both in the United States and in Europe. Preliminary data on second quarter GDP is released. Also, The Federal Reserve publishes its Beige Book of regional economic conditions and The National Association of Realtors reports on pending home sales in July. In Europe, Italian Prime Minister Mario Monti is expected to have a critical strategy meeting with German Chancellor Angela Merkel in Berlin. On Thursday, Mitt Romney is scheduled to accept the GOP presidential nomination in a speech at the party’s convention. The market week ends Friday in a very important way as Fed Chairman Bernanke addresses the central bank’s Jackson Hole, Wyoming economic symposium. American factory order data for July will also be released on Friday.
What does this mean for investors?
Where the first three weeks of August were very “quiet” from a market point of view, this week gets us back to information that is impactful. Investors need to “lock back in” on both the importance, and wide variety, of information coming at them this week, particularly the Federal Reserve meeting taking place in Wyoming.
-
All eyes will be on Fed Chairman Bernanke’s comments at the end of the week.
Will the Fed begin another round of quantitative easing, or will it not? The heart of the matter comes down to weighing costs and benefits of such a move. The Fed already has bought more than $2 trillion of Treasury and mortgage bonds to stimulate the economy. The Fed believes this drives down long-term interest rates, elevates stock and real-estate values and softens the dollar. In turn, the argument is that this lowers financing costs, increases U.S. companies’ global competitiveness and bolsters household wealth. But, are rates so low already that this will have no real meaningful impact? Recent data in a Johns Hopkins University study argues that quantitative easing benefits are only temporary.
What does this mean for investors?
Regardless of the ultimate direction of this particular conference, the Jackson Hole meeting over the past couple of years has had significant market impact. Going forward, we believe that Fed Chairman Bernanke is correct when he says that the more powerful, long-term economic impact can only come from political decisions within the legislative branch. Removing market uncertainty over items such as the upcoming “fiscal cliff” would have much more influence on markets than anything that the central bank can do. Frankly, it is hard to argue that the Federal Reserve has many “arrows left in its quiver.” Nonetheless, Jackson Hole has been a definite market “jumping off point” for one direction or another over the past couple of years and investors should monitor it very carefully.
-
The European Central Bank is considering additional “rate range” flexibility for its bond buying programs.
The latest bond-buying strategy that the ECB is considering involves using informal, flexible yield targets that could “wring out” some of the Eurozone “breakup risk” that seems to have become a permanent part of bond pricing there over the past few months. As opposed to setting a “hard ceiling” on the rate, providing a range would theoretically preserve the bank’s ability to change course and maintain pressure on governments over reform and budgets. Unlike before, the ECB would divulge far more details of its activities in order to guide markets as to its intentions. The hope is that borrowers such as Italy and Spain will be provided some borrowing cost “breathing room” in order to implement their long term austerity plans.
What does this mean for investors?
As we have said in this blog space many times before, the European problem is one of execution across a wide spectrum that is going to take considerable time. It is hard to see world economic growth rates returning to healthy, sustainable levels with such a major market as Europe being “on the sidelines” while the crisis grinds on.
-
With Spain’s economy still under tremendous stress, a fascinating “barter system” is beginning to rapidly accelerate, mainly among young workers.
If you have not done so already, we would recommend reading a fascinating article in today’s Wall Street Journal that points out how severe economic stress can alter even an industrial nation’s social compact. Spanish workers in the 16 to 24 age bracket have an astronomical unemployment rate of 53.4%. For 25 to 34-year-olds, the rate is 27%. Older workers have a much lower unemployment rate due to the fact that layoffs are costly under Spanish labor law. Because they have little money to spend, many young people in Spain are increasingly turning to bartering goods and services with one another through “time banks” that they have established with one another. For example, if your neighbor drives you to a certain destination that you need to reach and you do not have a car, you will repay them in “non-cash” services such as, say, teaching their children guitar lessons. This barter system is driving an increasing percentage of Spain’s economy “underground” where it is out of view of regulators and tax collectors.
What does this mean for investors?
This certainly shows how quickly an industrialized, European society can take a “step backwards” within its domestic economy when it is under severe stress. For investors, this is an excellent example of what European problems “just below the surface” actually look like and why the next “hand stack” by political leaders has financial markets increasingly cynical.
So, those are the items on our current radar this week around our investment firm. If you have any questions or concerns, 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.
Because of regulation, comments have been turned off.
