New & Noteworthy
January 27, 2012
Schwab Market Perspective: Slow Road to Normal
by Liz Ann Sonders, Brad Sorenset, and Michelle Gibley
The absence of the regular daily triple-digit moves in the Dow that characterized 2011 to start the year has felt a bit strange to investors who were getting used to the elevated volatility. However, recent action is more indicative of the way markets usually perform, and has contributed to nice equity gains so far in 2012. Additionally, it appears that at least some of the market attention has been taken off of the European debt crisis and we have seen some of the highly-correlated, risk on-risk off trades that dominated recently dissipate.
Key Points
* Market volatility has fallen and tight correlations have loosened, indicating to us some calming of fears and increased attention on more traditional economic and earnings-related news. We believe this is a good sign for stocks in the foreseeable future.
* The Federal Reserve unveiled its new communication strategy after its most recent meeting, reiterating that interest rates will likely remain extremely low for some time. Meanwhile, Congress returned to Washington to low expectations as we slog toward the November elections.
* The European picture is brightening slightly and there may be a glimmer of hope for stock market investors. After a soft patch, it appears that global growth may be turning around.
December 15, 2011
Fed Ends 2011 With a Whimper
by Liz Ann Sonders
The Federal Open Market Committee (FOMC) held its final meeting of 2011 and went out with a bit of a whimper. There were very few changes in its statement relative to November’s, although it did mildly upgrade its assessment of the economy: “The economy has been expanding moderately, notwithstanding some apparent slowing in global growth.” The Fed also gave a nod to recent improvement in jobs: “While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated.”
However, the Fed did downgrade its assessment of the investment climate: “Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed.” This last comment about housing was a touch perplexing given what it didn’t contain: any nod to the fact that in the past month there have been strong readings for mortgage applications, easier mortgage lending conditions and a surge in homebuilder sentiment.
Key Points
* There were no surprises out of the Fed meeting today, with short-term interest rates remaining pegged at zero.
* There was one dissenting FOMC member who wished for additional policy accommodation.
* Much of the Fed’s near-term focus remains on the eurozone debt crisis.
December 02, 2011
Schwab Market Perspective: Short-term pain…long-term gain?
by Liz Ann Sonders, Brad Sorensen, and Michelle Gibley
Macro factors have continued to dominate market action. Europe continues to move closer to a true crisis, a potential deficit deal in the United States went nowhere, and there are signs that the global economy is slowing down, with many European countries slipping into recession. However, as the crisis has intensified we’ve seen increased action, from coordinated intervention by global central banks to a loosening of monetary policy in China. These are likely only band-aids and don’t necessarily clarify the endgame for the eurozone. It is possible that an escalation in the crisis will ultimately force even more decisive action that remains lacking.
Especially in volatile periods it’s essential you match your asset allocation targets to your risk tolerance and that you have a diversified portfolio, even given elevated correlations. Dramatic market swings have become the norm, but we continue to believe that stocks are under-owned by investors generally, and offer an inflation hedge far superior to government bonds. As we’ve also witnessed this week, the expectations bar has been set quite low and with even marginally better news, the market can stage impressive rallies, catching many investors off-guard.
Key Points
* Markets have been under pressure as the crisis in Europe has recently intensified. This seems to be providing the impetus for more aggressive action and an eventual resolution, including this week’s coordinated central bank actions. Attention could return to the economic data in the United States, which continues to be largely better than expected.
* To the surprise of few, the so-called “supercommittee” failed to come to a deficit reduction agreement. While markets expressed initial disappointment, we believe their failure may end up being beneficial as it forces spending restraint.
* As the euro crisis has deepened, some steps have been taken but mostly address liquidity, not solvency. China has begun to ease monetary policy, which has historically benefited Chinese stocks.