posted 05/19/10 | Wealth Management
By D. Patrick Schumann, CFA
Vice President & Director of Investments
Enterprise Trust Company
STOCK MARKET REVIEW
Stocks
Stocks recovered some last week, while investors continue to sort through the implications of the financial pressures in the euro-zone and the global economic weakness. Volatility is up, investor nervousness (as measured by such things as flight to Treasuries) appears to be high and the bears are starting to hit the airwaves again. In fact, we saw one headline forecasting the Dow below 5000 soon. Could that happen? Of course, there are no guarantees in the marketplace, and we never say never. However, it does not appear likely in our view. We heard the same thing last year, when there really was a chance (although slim) that the world was falling apart. But, now we are in the midst of slow recovery. Yes, it is painfully slow (particularly in the context of today’s world of instant gratification), but it is solid. Challenges do remain, such as the fragility in the housing market, but each positive data point strengthens the foundation to be able to withstand pressures, such as the current crisis in the euro-zone. With the backdrop of such a slow recovery, there will be headline risk which can lead to more volatility. However, the longer trend is clearly positive (modestly, for now), and with asset prices still on the lighter side, we believe this is an attractive, long-term investing environment for stocks.
Software giant SAP is acquiring Sybase for $5.8 billion. Congress appears to be inching closer to passing some version of financial industry reform. The scope and implications are still uncertain at this point. 1, 3, 4, 7
FUNDS
Mutual Funds
Investors continue to pile into bond funds, adding another $8.6 billion last week. That more than compensated for the $1.3 billion outflows from stock funds (led by a decline in U.S. stock funds).
Money Funds
Breaking a streak of seventeen consecutive weeks of outflows, assets in money market funds actually grew by $24.2 billion last week to a level of $2.85 trillion. With volatility up and risk appetite down, some investors were surely looking for safety of principal. Government-fund inflows added to the growth. The seven-day yield on money market funds held at 0.03%.
Sectors
All Lipper indices rebounded last week with gains across the board. Small cap value gained 5.43%, heading the list, while the balanced index lagged with a gain of only 1.56%. 7, 11
FIXED INCOME & YIELDS
Treasuries
With heightened concerns regarding Europe, investors are pushing into Treasuries as a safer haven. The 10-year Treasury’s yield of 3.45% is well below its level at the start of this year, when it had topped 3.8%.
Corporate Bonds
Market concerns led to a decreased appetite for risk. As a result, pricing becomes less favorable and issuers have pulled back on new debt for now.
CDs and Mortgage Rates
Mortgage rates have fallen to their lowest level of 2010. Fixed-rate mortgages have fallen for the past five weeks, mainly due to the declining yield in the benchmark 10-year Treasury. The 30-year fixed rate is now at 4.99%, down from 5.03% the prior week. The average yield on a 6-month jumbo CD was unchanged at 0.45%, while the 2-year CD was down 0.01% to 1.18%. 3, 7
ECONOMIC REVIEW
Somewhat surprisingly, it appears many investors are focused on the risks making headlines (Greece, Goldman Sachs) and not on the solid progress the U.S. economy is making. Last week we received more good news within consumer spending and manufacturing. The further we go into the recovery cycle, the larger the shock will have to be in order to derail the U.S. economy.
Manufacturing
Industrial production rose 0.8% in April. Domestic demand is ok, and U.S. manufacturers are raising the output of raw materials for export, particularly with some economies (China) growing at healthy clips.
Housing / Commercial Real Estate
Last week, Fannie Mae asked for another $8 billion, which came a few days after Freddie Mac’s request for $10 billion. Housing is showing signs of stabilizing, and it appears Fannie and Freddie are helping that cause. But, at some point, one would think the Fannie and Freddie issue will have to be addressed.
Consumer
While housing remains a wild card, consumer spending continues to rebound modestly. April retail sales (as measured by the Commerce Department) were up 0.4%. Chrysler reported it may beat its 2010 targets. The household savings rate has pulled back a bit. While government spending has helped fuel growth, consumers are becoming a bit more comfortable loosening the wallets. Consumer spending is a key component, accounting for almost 70% of GDP growth. 3, 4, 6, 7, 13
INTERNATIONAL HIGHLIGHTS
China’s economy is growing at a strong pace, which is attracting investment from other parts of the globe. In the first quarter, China received over $95 billion in capital inflows, a substantial level. Incidentally, China’s stock market has fallen 16% over the past month (vs the U.S. down 1% and Europe down 6%). Since its high in August 2009, China is down 24%, qualifying for an official bear market.
The European Union and the International Monetary Fund announced a nearly $1 trillion plan to essentially bail out euro-zone countries, including Greece. Concerns remain, but markets did react positively to this news. Further, Europe’s economy grew modestly in Q1, helping to strengthen its ability to withstand these pressures. Spain and Portugal have announced initiatives to reign in spending, in an attempt to avoid some of the fiscal problems Greece has faced. 7, 13
CURRENCIES
Until we get some clarity on the European sovereign issues, the euro is likely to remain weak or at least volatile. Last week, the euro touched a 19-month low versus the U.S. dollar, closing at $1.24. 3, 7
COMMODITIES
Oil has declined in eight of the past nine trading sessions, closing last week at $71.61. In addition to the expectation for sluggish economic growth globally, record inventory levels are being reported at a key hub (Cushing, OK). Year to date, oil is down 10%. Gold, on the other hand, continues to hold its recent strengthening, as investors gauge how much Europe will add to inflationary pressures. Investors fleeing the euro are also boosting gold prices. Gold is up 10% in 2010. 3, 7
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Sources
1 Yahoo Finance 2 Briefing.com 3 Bloomberg 4 CNBC 5 Reuters 6 Associated Press 7 Wall Street Journal 8 Federal Reserve 9 Department of the Treasury 10 Bankrate 11 Lipper Inc. 12 Investment Company Institute 13 Commerce Department