The ECB cut their benchmark rate again by 0.25% down to 1.00% in an effort to ease strains on the ‘system.’ They also expanded the range of collateral for loans to banks, increased the maturity of those loans up to three years and lowered reserve requirements—easing on all fronts. Policymakers have been hesitant to go full-tilt on quantitative easing measures in the style of U.S. actions in recent years, partially out of the ‘moral hazard’ concern that such measures would reduce the incentive for individual member nations to get their act together. This is not surprising, but it’s the continuing story of the stronger countries not wanting to set a precedent of bailing out the weaker ones every time things get tough.
Along these lines, as the European summit concluded, Euro members Germany and France announced an agreement to enforce ‘fiscal discipline’ among the group—essentially, ‘refreshing’ the terms of the treaty set in place years ago with a new commitment for fiscal discipline in overall debt and annual deficit levels for each nation. If these limits had been followed in the first place, the problem would not have likely grown to this size. Markets were a bit disappointed, however, in continued lack of clarity—including direction about ECB purchases of sovereign debt outright to keep yields under control.
We still believe that a ‘TARP’-style outcome with capital injections and liquidity backstops from governments to major banks and other entities represents the ultimate and necessary outcome of this crisis—despite the reluctance of European leaders to head down this path as quickly as American officials did. This sign of confidence from leaders, including tools involving the IMF perhaps, is what investors are ultimately looking for.
Domestically, the November ISM Non-manufacturing survey reported in at 52.0 for the month, slightly worse than consensus expectations (53.8) and slightly worse than last month’s report (52.9). New orders and business activity components improved, while employment and supplier deliveries weakened. Factory orders also declined a bit, by 0.4%, during October.
Wholesale inventories moved up +1.6% month-over-month, which was a bit of a surprise and a lot more than expected. As a result of this, several GDP estimates for the fourth quarter have been revised upward by about ½ percent. The Trade Balance for October improved from -$44.2bn to -$43.5bn, which was mostly due to lower volumes of oil imports. This also is a benefit to potential GDP growth.
Jobless claims for last week came in at 381,000, which were fewer than last week and quite a bit fewer than expected. Some of this is a result of Thanksgiving and other Holiday seasonal adjustments, but these claims have been on a steady downward trend.
The Reuters/University of Michigan Consumer Sentiment Survey rose from 64.1 to 67.7 for December, and this, too, was better than expectations. Much of this month’s survey improvement was due to higher scores for consumer expectations. Interestingly, much of the decline in this index from June has now been reversed. It seems the self-fulfilling prophecy components of some of these index have now taken a turn toward the positive in a more meaningful way.
Market Notes
| Period ending 12/9/2011 |
1 Week (%) |
YTD (%) |
| DJIA |
1.42 |
7.98 |
| S&P 500 |
0.91 |
1.79 |
| Russell 2000 |
1.43 |
-3.75 |
| MSCI-EAFE |
-0.88 |
-11.23 |
| MSCI-EM |
-2.77 |
-18.86 |
| BarCap U.S. Aggregate |
0.16 |
7.05 |
| U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
| 12/31/2010 |
0.12 |
0.61 |
2.01 |
3.30 |
4.34 |
| 12/2/2011 |
0.02 |
0.25 |
0.92 |
2.05 |
3.03 |
| 12/9/2011 |
0.01 |
0.22 |
0.89 |
2.07 |
3.10 |
Markets experienced a positive week overall, aligned with hopes for concrete action in Europe. Smaller stocks and U.S. REITs experienced the strongest gains, while many equity indexes were in the +1% range. Financials and technology were the strongest performing individual sectors, while telecom, energy and materials lagged.
Foreign stocks in both the developed and emerging markets were down a bit, however. News that GDP growth in Brazil and India contracted last quarter weighed on sentiment; policymakers in these areas have been navigating across a fine line of keeping inflation in check, which pushes interest rates higher, and keeping growth afloat, which is a downward force on rates. These nations are very intertwined in the global economy, despite increased ‘decoupling’ that has occurred with growth in demand from their own domestic sources.
In the commodities space, industrial metals, such as nickel, earned positive returns, while gold and oil were weaker.
It is interesting to note that the Dow’s 4+% gain on Nov. 30 was the best one-day performance since March 2009. This is only a single session, and one can only take so much from that…but serves to be another anecdotal reminder for jittery clients that, over time, markets have typically moved faster and more positively than their sentiment has…when they finally feel ‘better’ about things, some very good opportunities may have been missed. Valuations now remain lower than historical averages.
Enjoy the week.
Karl Schroeder, RFC, CSA, CEP
Investment Advisor Representative
Schroeder Financial Services, Inc.
480-895-0611
Sources: FocusPoint Solutions, Goldman Sachs, Morgan Stanley, Morningstar, Payden & Rygel, Deutsche Bank, Wells Capital Management, Bloomberg, Reuters, Standard & Poors, MSCI, Barclays Capital, JPMorgan Asset Management, Northern Trust, Oppenheimer Funds, PIMCO. Index performance is shown as total return, which includes dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.