03/12/12: Now that your favorite basketball team has hopefully made it into the “Big Dance,” we’re now back to the reality of financial markets. 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” view of what’s coming up in the next five days. Starting the week today, the Treasury Department releases its February budget report. Tuesday is a mixture of politics and economic data, as Republicans hold presidential primaries in Mississippi and our home state of Alabama along with caucuses in Hawaii. Federal Reserve officials conduct a policy meeting while U.K. Prime Minister Cameron meets with President Obama at The White House. Wednesday brings data on international trade, as import and export prices for February are scheduled for release. Thursday is a big day for U.S. banks, as the Fed is expected to release stress test for the largest industry players. The market week ends Friday with reports due on consumer prices and industrial output.
What does this mean for investors? Simply put, that market influences these days are coming from many directions at once and doing so in true “real time” fashion. It is more important than ever to have financial advisors with the experience and knowledge to help you digest the data, separate the “noise” from the critically important, and design strategies to help protect and grow your wealth.
2. Improvements are expected this week in U.S. bank stress tests. As mentioned above, the Federal Reserve will release the results this week of its latest stress tests, which are expected to show broadly improved balance sheets at most American banks. If banks fall short, they could be required to raise billions in new capital, while positive results could translate to dividend increases and stock buybacks.
What does this mean for investors? Like any other organization, when banks are more confident in their own balance sheets, they can take more risk in the way of loans to businesses, particularly those of small to moderate size. What will be interesting to us is how the better stress tests will translate into possibly higher loan volume and thus enhanced corporate sector growth. This impact probably will be somewhat muted with large corporations, as they already have considerable amounts of cash on their balance sheets and would not be as inclined to borrow. However, “turning the lending faucet back on” could be of significant help to owner-managed businesses where the vast majority of new hiring in the country is generated.
3. How is our current slow economic growth generating such pronounced drops in the unemployment rate? At 8.3%, the unemployment rate has fallen 0.7 percentage points from a year earlier and is down 1.7% from a peak of 10% in October 2009. Many other measures of the job market are improving, with companies having expanded payrolls by more than 200,000 a month for the past three months. By contrast, the economy has grown at an anemic 2.5% annualized pace since the final months of 2009 and normally needs a much higher “run rate” to generate the drops in unemployment that we are seeing. How could this be? In a word, fear. Executive management in the United States was so shocked by the financial crisis in 2008 and 2009 that they fired workers more aggressively than they would in a conventional downturn. Over the last six months, as concern has subsided, many companies have changed direction and gone back toward normal staffing levels.
What does this mean for investors? That as these “lurches” in hiring and firing that we have seen over the past three years normalize, sustained employment growth will only occur with substantial growth in GDP. This creates for us a concern that the improvements that we are seeing in hiring could stall out. This could impact the American consumer, where 70% of the U.S. economy (and markets) are driven.
4. Chinese trade deficit numbers concern us. Where China generated substantial trade surpluses for much of this past decade, they are now running at a deficit. With this unusual result posted in February, the risk to growth in China has now replaced inflation as the major macroeconomic concern for that country. The weekend report of a $31.5 billion trade deficit in China for February was substantially larger than most analysts anticipated and was coupled with other disappointing economic data. The only positive news was that inflation slowed more than expected.
What does this mean for investors? Not to state the obvious, but what happens in this country really has global market implications. So goes China, so goes the world. No doubt, any slowdown will probably be a major issue in this year’s presidential election, as China continues to run large trade surpluses with the United States and the candidate with the best strategic plan for this dynamic most certainly will have a “leg up” in November.
Email me here or call me if you have any questions or concerns.
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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