Will the “Slow and Steady” Pace of the American Economy Be Overwhelmed by Europe This Summer?

Ashley Page, Senior Vice President, Investing Firm05/21/12: 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 as we move towards Memorial Day.  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 international political front dominates as the head of the U.N.’s nuclear oversight committee is in Iran ahead of talks scheduled for Wednesday between Tehran and six world powers.  Tuesday returns to a U.S. focus, as data on sales of existing homes for April are due and presidential primaries are held in Arkansas and Kentucky.  Wednesday is very busy with both domestic and political happenings, as figures on April new-home sales and March housing prices are released.  In addition, Egyptians vote in a two-day presidential election, European leaders hold an informal summit in Brussels, and officials of the Bank of Japan conclude a policy meeting.  Thursday brings reports on April durable goods orders along with weekly jobless claims.  The market week ends Friday with the always interesting report from The University of Michigan highlighting American consumer sentiment, this time for the month of May.  Finally, the bond market will close at 2 p.m. Eastern Time ahead of Memorial Day on Monday, when all U.S. markets will be closed.

What does this mean for investors?   We are particularly interested in how the later part of the week unfolds with the combination of durable goods, jobless claims and consumer sentiment data being released.  As with everything in life, confidence is at the core of good market results.  The University of Michigan data will be particularly interesting to see following on the heels of elevated headlines out of Europe.  Will the “slow and steady” pace of the American economy be overwhelmed by Europe this summer?

2.  The euro has been steadily losing ground against the dollar.  The euro settled at $1.278 Friday, a slight gain for the day.  However, that was down more than 3.5% over the past three weeks and almost 10% during the past year.  Concerns about Europe’s financial crisis and the prospect of Greece’s exit from the currency bloc have been behind the decline.Financial Market Outlook

What does this mean for investors?   The European situation is far from over in its impact on markets in the United States, and investors should expect to live with it in some form for quite some time.  As it always does, increased involvement from politicians (both here and abroad) introduces market unknowns that are hard to track and quantify.  There is nothing like a “free market barometer” such as the euro’s slide against the dollar to point this out.

3.  CEO pay is becoming much more tied to companies’ financial results and stock prices.  According to a very interesting report in the Wall Street Journal, CEO pay last year tracked recent share prices more closely than in previous years.  On average, for every additional 1% a company returned to shareholders in 2011, the CEO was paid 0.6% more last year.  For every 1% decline in shareholder return, the CEO was paid 0.6% less.  According to Steven Kaplan at The University of Chicago, recent CEO pay is “highly correlated with performance.”  As recently as 2010 this was not the case.  In that year, for every 1% decrease in shareholder return, the average CEO was paid 0.02% more.  Clearly, additional investor scrutiny and control emerged from the Dodd-Frank financial reform law passed in 2010.  Dodd-Frank gave shareholders an advisory vote on executive pay plans.  Although the votes aren’t binding, significant negative results are embarrassing to both corporate executives and directors.

What does this mean for investors?  When they are facing so much uncertainty in world markets, investors are simply not going to tolerate a lack of leadership and stewardship from executive suites.  When the relationship between pay and performance breaks down, investors are going to be much quicker (and have the tools) to voice displeasure.  Accountability and transparency we see as good things for markets, as they increase investor confidence.

4.  Don’t expect executives at Facebook to “friend” the folks at Nasdaq anytime soon.  The Nasdaq reported on Sunday that it performed poorly on Friday’s Facebook initial public offering.  Apparently, technology problems impacted trading in millions of shares.  The main issue?  A malfunction in the trading system’s design for processing order cancellations, a problem that Nasdaq’s  “beta testing” of the system ahead of time failed to spot.  Estimates are that up to 30 million shares traded were impacted.

What does this mean for investors?  Investors need to remember that despite the “sexiness” of IPOs in “hot” companies, there are embedded risks in raising capital for young firms that may be easy to overlook.  Again, trust and confidence are at the core of financial markets, and if technology falls short as it did on such a high profile day as this past Friday, it does nothing to help faith in the market system.

If you have any questions about the economy in relation to your portfolio, please don’t hesitate to call me at (205) 989-3498 or email me here.

Ashley Page
Senior Vice President
Wealth Consultant

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