William Riegel, Head of Equity Investments
The improving U.S. economy has begun to dominate the market environment, with 18 consecutive weeks of favorable data supporting higher stock prices. For the week ended February 4, initial claims for unemployment benefits fell by 15,000, to 358,000—a nearly four-year low. Meanwhile, consumer credit jumped 9.4% in December 2011, indicating both rising consumer demand for credit and increased willingness on the part of lenders to meet that demand. We believe that a more confident consumer may bode well for spending and provide a boost to overall growth.
Reflecting the recent flow of positive economic news, equity markets have remained buoyant. The S&P 500 Index returned 4.5% last month, marking its best January in 15 years. January’s robust returns were followed by additional gains in the first several days of February. Month-to-date through February 9, the S&P 500 was up by about 3%, while foreign developed-market stocks, as measured by the MSCI EAFE Index, were up more than 4%, led by markets in the eurozone. The MSCI Emerging Markets Index was also up more than 4% month-to-date.
Even with major macro events at the forefront, market performance over the past several weeks has created potential opportunities for investors seeking individual stocks based on the underlying company’s fundamentals, rather than on broader moves based on fear or other emotions. In fact, one outcome of the strong market gains in January and February has been a sharp decline in correlations among individual stocks, meaning they are less likely to move in lockstep. This generally favors investors who are stock pickers rather than crowd followers.
A potential short-term negative for the markets is that as trading sentiment has drifted higher, markets are at risk of reaching an overly optimistic zone that is often associated with pullbacks. Also notable is that the recent lift experienced by U.S. stocks has occurred on very low trading volumes. In our view, these light volumes are not an encouraging sign from a technical perspective, and they reinforce the possibility that we are currently experiencing a mere “cyclical” bull market—that is, a shorter-term, unsustainable upswing that may be lacking in investor conviction—rather than a longer-term “secular” market driven by forces that could be in place for years.
We are keeping a close eye on a number of significant developments that may influence market performance in the near term. In the U.S., a $26 billion settlement between state and federal governments and five of the nation’s largest banks was announced on February 9, addressing housing foreclosure abuses and offering assistance to troubled homeowners by reducing the amounts they owe on “underwater” mortgages. While the agreement is not a panacea for the ills of the housing market, it is expected to provide immediate benefits for about one million homeowners.
In Europe, the Greek government hammered out an agreement on another round of austerity measures that will require final parliamentary approval in order for Greece to receive additional funding and avoid a debt default in March. Heading into the weekend, financial markets—which had been responding favorably to signs of progress in resolving Europe’s debt crisis—were rattled by fears that Greece’s internal political wrangling could potentially derail, or at least delay, the latest efforts.
Overall, the markets have grown more confident that the aggressive steps taken by the world’s central banks to support liquidity on a global basis will help stave off a global recession, and that the recession that many believe is already under way in Europe may be milder than initially anticipated.
The information provided herein is as of February 10, 2012.
The material is for informational purposes only and should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services may not be available to all entities or persons.
Past performance is no guarantee of future results.