02/27/12: 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. Beginning today, the National Association of Realtors releases its pending home sales index for January. Tuesday is very busy on both the economic and political fronts, as data on last month’s durable goods orders is released, The Conference Board reveals its February consumer-confidence index, the S&P/Case-Shiller home price index for 20 cities is published and Republicans hold presidential primaries in Michigan and Arizona. “Leap day Wednesday” is heavy with the Federal Reserve, as Chairman Bernanke delivers the FOMC’s semiannual report and Fed governors assess economic conditions nationwide with publication of the Beige Book. On Thursday, construction spending data for January is released and the EU’s governing European Council begins two days of talks. Friday is relatively quiet, with the only item of international note being the Iranian parliamentary elections.
What does this mean for investors? As was the case last week, U.S. domestic data is “front and center” with a combination of commercial data and consumer metrics impacting markets. The consumer numbers are heavily slanted towards what is occurring in home ownership, an area of our economy that we would love to see get reinvigorated, particularly with all that is tied to it.
2. From our “Wow, that’s hard to believe” department, junk bonds are actually back in vogue with many investors. According to Lipper, retail investors have placed $11.8 billion into junk bond mutual funds this year, compared with $4.8 billion for stock funds and $9.9 billion in investment-grade bond funds. Why is this happening? Simply put, many bond investors are moving away from low yield U.S. Treasury debt and many stock investors are wanting protection against market volatility swings. The premium being paid to high-yield investors over U.S. Treasuries, also known as “spread,” is 6.3%.
What does this mean for investors? Investors using junk bonds as an alternative to U.S. Treasuries should carefully consider the risks associated with these types of investments. (High yield/junk bonds [BB or below] are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of the diversified portfolio for sophisticated investors)
3. The recent G-20 talks have been long on discussion and short on action. G-20 officials met this weekend, accomplishing very little other than discussing global economic issues. Most importantly, ministers put off until their next meeting in April any consideration of new international support for Europe. Other issues discussed were the potential harm to the global recovery of rising oil prices and the need to change part of the Volker Rule, which bans prop trading of foreign sovereign debt.
What does this mean for investors? Not much, other than serving as a further highlight of some of the issues that markets have on their collective minds, particularly Europe and oil prices. A growing global economy would certainly take some of the “sting” out of any significant negative surprise from Europe if it can just keep going, but rising fuel costs may threaten that positive dynamic.
4. There is also more focus this week on the long term structure of the Chinese economy. World Bank president Robert Zoellick introduced its “China 2030” report today in conjunction with a major Chinese think tank. As for the near term, the report predicts that China will probably have a “soft landing” in its economy, a positive for the world outlook in general. Longer term, the report states that sustainable economic expansion in China will require redefining the government’s role, paring back state-owned enterprises and gradually allowing market-set interest rates.
What does this mean for investors? Not to state the obvious, but the size of the Chinese market makes it a major international player and significant “driver” of financial markets throughout the world. It will be fascinating to see what the economic impact could be world-wide if market “distortions” caused by close government control in many areas actually abates.
Does this bring up any questions or concerns? Feel free to email me here or call me at (205) 989-3498. I would be delighted to talk 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.
Because of regulations, comments have been turned off.