05/14/12: As we always do at the beginning of the market week, we wanted to give you a “look ahead” at a few items that we will be tracking carefully during the next few days. These are just a few opinions that we have, and as with life, nothing is certain about them.
1. First, here is a “week-at-a-glance” view of several key market drivers for the next five business days. Beginning today, the focus continues to be “across the pond” as European finance ministers meet in Brussels. Tuesday is busy both domestically and internationally, as the U.S. issues the consumer-price index and retail sales data for April and the National Association of Home Builders posts its housing market index for May. Also on Tuesday, Francois Hollande is sworn in as French president and later meets with German Chancellor Merkel. On Wednesday, the Fed releases minutes of its April meeting and data on industrial production and housing starts for the same month are also due out. Thursday brings data from the Labor Department on weekly jobless claims and Japan releases its preliminary estimate of first-quarter gross domestic product. The market week concludes Friday with leaders from the Group of Eight nations beginning a summit at Camp David.
What does this mean for investors? Investors need to keep a close eye on Europe this week, as Greece is at another crucial “decision point,” Chancellor Merkel’s party lost a major state election over the weekend that could potentially be impactful in their general election next year, and Spanish banks are having to shore up their balance sheets in line with new capital requirements. Our concern is that, despite its small size, Greece’s current financial volatility (and market focus on same) could possibly translate in negative ways to Spain and Italy.
2. Economists seem to be looking for subdued growth for the rest of 2012, but beware of “fiscal shock.” Forecasters surveyed by The Wall Street Journal expect the economy to grow at such a modest pace this year that unemployment will barely budge. Slow but steady growth appears to be the most common opinion, with GDP expanding faster than first quarter’s 2.2% pace, but below the 3% mark. The jobless rate – at 8.1% in April – hasn’t moved much. The “good news” is that the prospect of another recession over the next 12 months remains remote.
What does this mean for investors? One of the bigger risks out there is that growth, already at a slow pace, could slow down even more if political inaction this year threatens us with a “fiscal shock.” This is a reference to the large spending cuts and tax increases scheduled to be automatically enacted at the beginning of 2013 unless Congress takes action. Simply put, if businesses anticipate such a fiscal shock, they may further slow investment and hiring.
3. The German State elections over the weekend could potentially signal a political change in Germany that could have significant market impact in both 2012 and 2013. In another sign that politicians can continually “move the goalposts” in financial markets, it is well known that Chancellor Merkel’s strong austerity stance has been a major factor in keeping the European situation under some semblance of control. But, what would happen should she be threatened with losing Germany’s next general election? Over the weekend, Germany’s biggest state, North Rhine-Westphalia, went solidly “anti-Merkel” with the combination of liberal Social Democrats and Greens winning a 51% majority of the vote. The American equivalent of losing California, North Rhine-Westphalia (capital: Dusseldorf) accounts for 21.7% of Germany’s GDP and draws 28% of the country’s foreign investment. Merkel’s Christian Democratic Party was defeated much more soundly than was anticipated, despite her popularity nationally (69% approval rating).
What does this mean for investors? Investors need to watch carefully whether or not the state elections will begin to moderate Merkel’s financial stance for Europe, particularly against the backdrop of Sarkozy’s defeat in France. Will European markets become more risky if they lose both of their austerity champions?
4. What could be the most telling long term impact of the J.P. Morgan trading loss? Once again, politicians are becoming market drivers much more than they ever have in the past. In an excellent opinion piece in the Wall Street Journal this morning, the author said that it is worth noting that “once upon a time,” a $2 billion banking loss was a problem for the bank, not politicians. However, in the post Dodd-Frank world, the country’s larger banks have “morphed” into a status much like regulated utilities. Unfortunately, the trading loss will give regulators an even bigger excuse to get more involved, not less. It seems to us that Morgan just handed the government an even bigger bat to hit them (and other large banks) with.
What does this mean for investors? When trying to analyze markets, the political component impacting them is as pronounced as it has been in years. Focusing on economic data alone is clearly inadequate these days. Investors need to be as politically engaged, as they ever have been, in analyzing their market risks. Despite being totally different fact patterns mentioned above (Merkel and Morgan), political forces are the common denominator in both. No doubt, this trend is here to stay, and investors need to be wary of it.
Do you have concerns or questions about the current markets. Call or email me here. I would enjoy talking with you.
Senior Vice President
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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