03/26/12: Good morning, everyone! We hope that you had a great weekend. 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 National Association of Realtors issues its pending home sales index and Fed Chairman Bernanke addresses a conference on economic policy. Tuesday brings the release of the S&P/Case-Shiller 20-city home price index for January along with publication of The Conference Board’s survey of consumer confidence. Wednesday has a domestic/international combination with data on February’s durable goods orders being published along with a gathering of leaders from Brazil, Russia, India, China and South Africa meeting at the BRICS summit in New Delhi. On Thursday, the third estimate of fourth-quarter GDP is on tap and Spanish unions have a one-day general strike planned. The market week ends Friday with The University of Michigan providing its reading on consumer sentiment and The Commerce publishing reports on personal income and spending.
What does this mean for investors? Although there are some significant international happenings, this is a significant week for data revealing the confidence of the American consumer. Remember, 70% of the economy of the United States is consumer driven, so this data week is very important for markets.
2. ObamaCare heads to the Supreme Court. Simply put, we probably haven’t had a Supreme Court case this closely watched for many years. The court this week hears three days of arguments (which is unprecedented in and of itself) on the law’s constitutionality, with a ruling expected in late June. Not only could the ruling have an impact on this fall’s elections, but it could also help define for generations what Congress is and isn’t entitled to do. In discussing the issue at length in our offices, we simply cannot see how the Commerce Clause can have this far of a reach to uphold the individual mandate.
What does this mean for investors? However the court decides, all investors are impacted by this. The increase in health care costs touches every phase of our economy. What businesses and individuals are required to do in the healthcare arena will have significant market impacts for years to come. Just after salaries and benefits, healthcare costs are clearly the major expense for the vast majority of American businesses. Cost structure impacts net income and earnings are a major driver of stock prices. Obviously, what happens to the cost structure of healthcare will have widespread market impact over time.
3. In the “tug of war” between stocks and bonds, stocks seem to be gaining the upper hand lately. As confidence in the U.S. economy continues to grow of late, the tide may begin to slowly turn in favor of stocks once again. Will a growing focus on economic recovery and risk taking overtake the preoccupation with safety and sluggish growth that we have seen of the past few years? The Barclays Capital U.S. Aggregate bond index, which covers the investment-grade bond market (including government and corporate bonds as well as mortgage-backed and other asset-backed securities), has returned roughly 113% to investors since December 31, 1999. By comparison, the S&P 500 index has returned 19% in the same period, including share-price gains and dividends. Where bonds have seen a bull market over three decades, will this be the case going forward? Will equities now start to win out again?
What does this mean for investors? That caution still needs to be the watchword. There are still plenty of reasons to be careful about the stock market this year. Among them, expectations for corporate earnings are dropping, there is more pronounced softness in demand for commodities in Asia and rising oil prices could begin to damper consumer spending. And, while it does not seem to be as much of a focus lately, the European debt crisis is far from being resolved conclusively.
4. Merkel’s resolve is again being tested in Europe. Angela Merkel appears to be on the cusp of bowing to intense international pressure by allowing the eurozone’s “firewall” to temporarily increase to $1.25 trillion in order to calm markets. The firewall would be temporarily “elevated” by combining the temporary EFSF rescue fund with the permanent ESM fund now in place. Once the situation improves, the funding level would “fall back” to only the permanent ESM amount once the EFSF expires in 2013.
What does this mean for investors? As we just pointed out above, the financial problems in Europe are far from over. Investors would be wise not to be fooled by less front page news on the subject as of late and realize that this market risk dynamic will continue to be with us for quite awhile.
Please call or email me here 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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