In contrast to last week’s busy economic data reporting, Monday will have no scheduled U.S. economic reports. Friday’s flat market, as measured by the S&P 500, produced a small gain for last week. There was a higher open Monday morning despite another flare-up overnight on the Korean peninsula. The French Finance Minister’s statement that debt restructuring was not on the Eurozone’s agenda likely helped sentiment. Further, European markets were up in mid-day trading, perhaps a sign the market has discounted expected ratings downgrades which have been in the news. Commodities prices are broadly higher this morning even without help from the dollar, which is up marginally.
Here are four items that we were discussing around the office this morning that we thought would be of interest to our readers:
Overall, last week was a very strong one for economic data. 85% of last week’s set of U.S. economic data beat expectations, 80% accelerated from the prior period, and more than 75% of the data saw upward revisions to prior period’s data. A real Gross Domestic Product (GDP) fourth-quarter growth rate of between 3 and 3.5% is likely.
Treasury yields declined sharply on Friday following Moody’s decision on Ireland. Moody’s cut Ireland’s sovereign debt rating to Baa1 from Aa2. Other European nations have their credit ratings on review and some may be downgraded over 2011 as nations struggle to cut their budget deficits.
Meredith Whitney had an ominous municipal bond forecast on 60 Minutes last night and how it compares to Europe. No doubt, there are significant financial challenges facing U.S. states. However, there are two main differences. First, the magnitude of the problem facing some European nations is much greater. For example, the budget deficit to GDP for some of the most troubled states, such as California, New York, and Florida, average about 1%, while European nations like Greece, Ireland and Spain average about 10%. Further, the debt-to-GDP ratio for these same states average about 20% (well below that of the U.S. federal government) while the European nations are around 100%. Second, banks in the U.S. do not own much municipal debt, while European banks do own considerable European government debt. This dynamic magnifies the problem in Europe.
Diversification, we’re glad to see you again! In 2008 and 2009, most markets moved together as the outlook for all financials assets was tightly tied to the global financial crisis and recovery. During 2010, glimmers of the impending return to diversification became evident as markets began to behave more independently of each other. A key potential benefit of having investments behave differently is that overall volatility is muted.
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
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.