William Riegel, Head of Equity Investments
Equity markets had a bumpy ride in the first full week of March, amid daily headlines that alternately sparked fear and optimism among investors. Fear held sway early in the week, with both the S&P 500 Index and the Dow Jones Industrial Average falling more than 1.5% on March 6. The Dow’s 204-point drop that day marked the first time the index had shed more than 200 points in a single session since last November.
One source of anxiety was China, which lowered its official target GDP growth rate for 2012 from 8% to 7.5%, causing fresh worry about the strength and trajectory of the global economy. At the same time, initial reports out of Greece fueled speculation that the government’s planned €200 billion ($262.98 billion) voluntary debt swap was failing to attract an adequate level of participation. Through the plan, private holders of Greek sovereign debt had until March 8 to agree to exchange their existing holdings for new issues, thereby accepting losses of more than 50%. The lack of a successful debt swap would have imperiled a second round of bailout funds that Greece needs to help avoid a disorderly credit default.
By mid-week, the markets breathed a sigh of relief as it appeared likely the deal was on track. On the morning of March 9, the Greek government confirmed that 83% of its private sector creditors—well above the threshold needed—had agreed to the terms of the swap.
Markets also perked up at mid-week on unofficial reports that the Federal Reserve was contemplating new forms of quantitative easing that might be attempted if the U.S. economy needs further monetary stimulus to help bolster and sustain the moderate pace of recovery. Evidence of the economy’s continuing improvement came in the form of favorable data on weekly first-time jobless claims, solid private-sector employment growth, increased activity in the service sector and rising consumer confidence.
Labor productivity in the U.S. has been running at a relatively slow pace, coming in at 0.9% for the fourth quarter of 2011 and 0.4% for last year as a whole. Slower productivity, which over time is a negative in terms of limiting increases in the standard of living for workers, is potentially good news for labor force utilization in the near term, as more employees will need to be hired in the event of an upturn or continued strength in the economy. The relative health of the U.S. labor markets was confirmed on the morning of March 9 with the release of government data showing that the economy added 227,000 net new jobs in February, while the national unemployment rate held steady at 8.3%.
While the week’s positive developments were welcome, global equity markets appear to have lost a bit of steam in recent weeks. Moreover, there has been a shift away from smaller, riskier markets and toward higher-quality, large-cap companies. Month-to-date through March 8, the MSCI foreign developed and emerging market indexes returned –1.2% and –2.4%, respectively, while the S&P 500 Index returned +0.1%. Between February 15 and March 8, the small-cap Russell 2000 Index returned –1.7%, while the Russell Midcap Index returned +0.4%, and the Russell Top 50 Index, representing the largest U.S. companies, gained +2.0%.
We remain focused on the relative attractiveness of large-cap U.S. stocks and believe they may be on the verge of a sustained move, both because they are currently cheap and because the market tends to rotate toward large-caps during periods of global economic and geopolitical uncertainty, such as we are now experiencing.
In fixed-income markets, the climate for European bonds has improved, with Spanish and Italian bond yields falling in response to the completion of the Greek debt swap. Meanwhile, U.S. Treasuries have remained relatively stable, with yields continuing to trade in a fairly narrow range, as they have done all year. For longer-term Treasury yields to rise significantly, we would likely need to see sustained increases in U.S. jobs and GDP growth going forward. Such increases are far from a given, however. While the overall economic picture is good, more recent indicators point to a growth rate that has slowed from levels we saw late last year and earlier in 2012.
The information provided herein is as of March 9, 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.
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