02/06/12: We hope that everyone had a good Super Bowl weekend! In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s our opinion on four major decisions that could have impact on markets and investors this week:
1. First, here’s a “week-in-a-glance” list of key data items over the next five days. Beginning today, Germany releases statistics on manufacturing orders for December. Tuesday is a combination of Federal Reserve and primary politics, as Chairman Bernanke testifies about the economy before the Senate Budget Committee and two states hold GOP caucuses (Colorado and Missouri) and one state conducts its GOP primary (Missouri). Wednesday is focused on energy, as data on U.S. petroleum inventories is released. Thursday has a decidedly international slant, as officials of the European Central Bank and the Bank of England conclude policy meetings, President Obama meets with Italy’s prime minister on European debt issues and China releases inflation numbers for January. The week concludes Friday on a domestic economic note, as the U.S. reports its trade balance for December, The University of Michigan issues its initial readings on consumer sentiment for February, and the Treasury releases January budget numbers.
What does this mean for investors? Simply put, the markets are being driven by a wide variety of domestic and international forces these days. Also, the “political influence” on investors seems to be as pronounced as it has been in years. This can be harder for investors to deal with, as governments can really “move the goalposts” on markets.
2. Corporate profits are beginning to show some weakness. Beginning in 2009 and continuing through the last quarter in 2011, U.S. companies have been able to increase profits despite very anemic growth. This has been accomplished through cost cutting and improving efficiencies. Now, the problem is that corporate America is running “lean and mean” and there is not much cost cutting that can be done. It seems to us that corporate profits going forward will need to be derived more from “good old fashioned” revenue growth. Hopefully, emerging market consumers will help with this dynamic. S&P companies beating earnings projections have fallen from 80% in the first quarter of 2010 to 60% presently.
What does this mean for investors? Strong corporate profits have been a good “counterweight” to the volatility that continues to be produced in Europe. Further, they have been a key driver in recent favorable market performance. Weakness in U.S. corporate profits would allow other factors to “bubble up” in the minds of investors.
3. Europe, more Europe and still more Europe. First, Greek debt talks continue to drag on (enough already!), with the three political parties involved agreeing in principal last night for more austerity, including cutting spending in 2012 by 1.5% of GDP, re-capitalizing banks without nationalizing them and lowering pensions. Major differences still continue to exist on the wages and the banks, so the implementation phase is far from over. Debt figures from across the Eurozone show just how unsuccessful the handling of the debt crisis has been, with the sovereign debt of Greece, Portugal and Ireland all still rising.
What does this mean for investors? Europe still remains a major “volatility threat” for the markets in 2012 and has by no means disappeared.
4. Remember, dividend stocks and bonds are not the same. In an excellent article in today’s Wall Street Journal, the recent trend for investors to generate “steady” income from dividend paying stocks rather than bonds was highlighted. Because U.S. Treasury yields are near historic lows, investors have been seeking out dividend paying stocks instead. What most investors overlook in this change is that while it seems “very similar,” it is in fact a significant change in asset allocation. Equities don’t behave the way bonds do and the risk profiles are quite different.
What does this mean for investors? Investors should never “automatically equate” different asset classes just because they appear to be very similar in results at times. Always have a clear understanding of how the risks are different.
Should you have any opinions, comments or questions, please call or email me here.
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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