We live in challenging times, but when has anything ever been smooth sailing?\u00a0 The financial markets are aware of outstanding issues in the world, and collectively price them in accordingly.\u00a0 That\u2019s why the surprises (both good and bad) have the tendency to result in overshoots of market reaction.\u00a0 For example, despite Tuesday\u2019s \u201ccrisis,\u201d markets were already up again Wednesday.\u00a0 In October, the S&P gained 11%, which helped reverse a good bulk of August and September\u2019s losses.\u00a0 Despite the high degree of volatility, however, we are not as far away from late July\u2019s level as it might appear.<\/p>\n
Few people had heard of MF Global until last week, when the financial derivatives broker filed for bankruptcy.\u00a0 As has been in the news during the last week, the firm, led by former CEO and former NJ Governor John Corzine, made highly leveraged bets on European government bonds that are now going bad\u2014and allegedly co-mingled these bets with customer accounts.\u00a0 Fortunately, MF Global is not considered a \u201csystematically important\u201d financial institution in terms of the workings of the U.S. and global financial systems.\u00a0 What differs from Lehman Brothers in 2008 essentially was Lehman\u2019s key role as an investment bank and issuer of credit default swap contracts.<\/p>\n
We\u2019ve received a few questions about how this latest episode is different from 2008.\u00a0 At that time, the breakdown was due to several unique factors, many of which acted as surprise to markets. \u00a0No one (including the rating agencies) felt that mortgage-backed securities had the potential to lose value as quickly as they did.\u00a0 That was the \u201csurprise\u201d part, and, long-story short, led to repercussions the markets reacted to.\u00a0 It was intensified by how almost everyone underestimated the importance of homebuilding and the real estate market<\/a> on the economy.<\/p>\n The European situation is not a new event.\u00a0 This has been developing quietly over recent years and started becoming a crisis months (really, years) ago.\u00a0 The accord reached October 27 was an important moment for two main reasons.\u00a0 First, the EU essentially provided the underpinning for a backstop in the event banks\/insurers\/other bondholders are not able to raise sufficient capital of their own.\u00a0 Second, it came to an agreement with these banks to strengthen themselves.\u00a0 Getting them all to agree on anything at all considering all of their different interests is an important milestone.<\/p>\n So now, the European debt issue is no longer a surprise (which again implies it is priced in to the market.).\u00a0 Now, we\u2019re down to specifics and where we go from here after the clean-up. That will still take time.\u00a0 But, like in the U.S., taking a large backstop in the form of debt has its own repercussions, such as potential currency depreciation and inflation down the road. This is not new to us; in fact, we\u2019ve been positioned for this in advance (probably a bit early, in fact).<\/p>\n Greece has been somewhat contentious politically (as have many countries), so this \u201ctheater\u201d is not surprising or unexpected.\u00a0 They are being asked to make big sacrifices and give up a way of life and entitlements that many Americans and other Europeans don\u2019t enjoy.\u00a0 The politicians there have to save face, and no one wants \u201causterity.\u201d\u00a0 However, the reality is that being part of or at least tied into the Eurozone is crucial to their economic growth, and recent polls have shown that that \u00be of Greeks want to remain in the currency union.<\/p>\n These are challenging times, no doubt, and we realize that many clients are concerned about both the economy and the world.\u00a0 However, in the most dramatic cases for clients ready to cash it all in (for now), it comes down to the classic question… if an investor moves out of the markets now when he\/she\u2019s feeling most uncertain, when do they move back in?\u00a0 When they feel more certain?\u00a0 Unfortunately, that usually doesn\u2019t happen until the market has rallied by a significant amount.\u00a0 With a diversified portfolio, we are better braced for a variety of possible external events, making the \u201cin\u201d or \u201cout\u201d decision less relevant.<\/p>\n Economic Notes <\/em><\/strong><\/p>\n First, a word about recoveries.\u00a0 Recoveries can often be momentum events, and although surveys of \u201cconfidence\u201d seem a little imprecise to include in an analysis of the economy, it\u2019s these intangible factors that can lead to a self-fulfilling prophecy (in both directions).\u00a0 We are not contrarian by nature, so when conditions \u201cfeel\u201d better to people, they begin to spend more, much in the same way many individual investors put more at stake after markets have already begun to improve.<\/p>\n The European Central Bank<\/strong> cut interest rates from 1.50% to 1.25%, which was, surprisingly, somewhat of a surprise, in a response to downward revisions to economic forecasts.\u00a0 Why not cut rates further?\u00a0 Europe has a more conservative view than we do about monetary growth, mostly as a result of a legacy of inflation episodes in their history. \u00a0Therefore, they may be a bit more reluctant to floor the gas pedal as we are.<\/p>\n The Fed statement<\/strong> following the FOMC meeting showed very few surprises, as we mentioned in a special note earlier in the week.\u00a0 While the \u201csignificant downside risks\u201d remain (mostly due to European debt crisis uncertainty), the FOMC\u2019s assessment of current U.S. economic conditions was more upbeat than in previous recent meetings as growth has \u201cstrengthened somewhat.\u201d\u00a0 That said, they feel keeping rates low for the foreseeable future and keeping asset purchase programs in place is prudent considering the tenuous environment for growth.\u00a0 Additionally, they actually lowered longer-term forecasts for GDP growth in coming years down to 1.5-2.0%, and raised levels for expected unemployment from the low 7\u2019s to about 8% for 2013.\u00a0 Accordingly\u2014with this slower expected growth\u2014inflation expectations were somewhat contained.<\/p>\n The Chicago Purchasing Managers Index<\/strong> declined a bit, from 60.4 to 58.4\u2014which was largely expected.\u00a0 It is still high in relative terms, in keeping with decent manufacturing strength in the region.\u00a0 While new orders fell, employment increased.<\/p>\n The ISM Manufacturing report<\/strong> was weaker in a headline sense at 50.8 versus 51.6 last month, but fairly consistent with expectations.\u00a0 The composition of the report itself was positive, though, as new orders rose.\u00a0 Prices paid fell fairly dramatically, which represents a lessened headwind to company inputs and potential inflation, and inventories fell\u2014the majority of the negative number, but not necessarily a bad thing.\u00a0 Construction spending picked up slightly, but barely enough to notice at 0.2%.\u00a0 The ISM Non-Manufacturing<\/strong> index published a few days later was weaker by only 0.1, but lower than expected.\u00a0 On that side, new orders were down but employment rose to the highest levels in months, and factory orders rose.<\/p>\n The ADP Employment Report<\/strong> showed job growth of 110,000 in the private sector, which was a bit above consensus estimates of 100k.\u00a0 Manufacturing employment fell, while service jobs were up, as was hiring by small- and mid-sized firms, which has been an area of particular stagnation and negative media focus during this most recently recovery.\u00a0 A day later, Initial Jobless Claims<\/strong> were also lower than expected, at 397k, down from 406k last week.\u00a0 This number has been trending downward in recent months, but looks to be at least partially due to jobseekers falling off the benefit rolls.<\/p>\n The Non-Farm Payroll Employment<\/strong> number was slightly below expectations (and less than outstanding), at 80,000, but some upward revisions to prior months were a positive thing.\u00a0 Much of the job losses continued to be on the state\/local government end, in continuation of the ongoing trend of the last two years.\u00a0 The unemployment rate<\/strong> fell from 9.1% to 9.0%, which captures of mainstream headline news, especially in this most recent recovery where jobs have not been added at a brisk pace.\u00a0 This is somewhat intuitive, but these two numbers go hand-in-hand to a large extent:\u00a0 the smaller the monthly job gain, the longer it takes for the unemployment level to drop…<\/p>\n <\/p>\n Market Notes <\/em><\/strong><\/p>\n <\/p>\n 1 Week (%)<\/strong><\/p>\n<\/td>\n YTD (%)<\/strong><\/p>\n<\/td>\n<\/tr>\n -2.01<\/p>\n<\/td>\n 5.72<\/p>\n<\/td>\n<\/tr>\n -2.45<\/p>\n<\/td>\n 1.33<\/p>\n<\/td>\n<\/tr>\n -1.89<\/p>\n<\/td>\n -3.74<\/p>\n<\/td>\n<\/tr>\n -6.00<\/p>\n<\/td>\n -9.12<\/p>\n<\/td>\n<\/tr>\n -2.03<\/p>\n<\/td>\n -14.05<\/p>\n<\/td>\n<\/tr>\n 0.84<\/p>\n<\/td>\n 7.16<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n 3 Mo.<\/strong><\/p>\n<\/td>\n 2 Yr.<\/strong><\/p>\n<\/td>\n 5 Yr.<\/strong><\/p>\n<\/td>\n 10 Yr.<\/strong><\/p>\n<\/td>\n 30 Yr.<\/strong><\/p>\n<\/td>\n<\/tr>\n 0.12<\/p>\n<\/td>\n 0.61<\/p>\n<\/td>\n 2.01<\/p>\n<\/td>\n 3.30<\/p>\n<\/td>\n 4.34<\/p>\n<\/td>\n<\/tr>\n 0.01<\/p>\n<\/td>\n 0.28<\/p>\n<\/td>\n 1.13<\/p>\n<\/td>\n 2.34<\/p>\n<\/td>\n 3.36<\/p>\n<\/td>\n<\/tr>\n 0.01<\/p>\n<\/td>\n 0.22<\/p>\n<\/td>\n 0.88<\/p>\n<\/td>\n 2.06<\/p>\n<\/td>\n 3.09<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n <\/p>\n Markets had a mixed week but equities ended largely down as sentiment was \u201crisk-off,\u201d the opposite of the prior week.\u00a0 As noted above, the uncertainty surrounding the implementation and Greek acceptance of the Euro accord added to investor selling (foreign stocks fared the worst last week), as did mixed employment data on the U.S. side.\u00a0 Bonds were largely up, as was the U.S. Dollar, so foreign debt suffered.\u00a0 Commodities were roughly flat.<\/p>\n It is interesting to note that now that over 400 companies in the S&P have reported earnings, roughly \u00be have topped estimates.\u00a0 Corporate entities are in strong fundamental shape, and seem to be the opposite of their corresponding governments.<\/p>\n Enjoy the week.<\/p>\n Karl Schroeder, RFC, CSA, CEP<\/p>\n Investment Advisor Representative<\/p>\n Schroeder Financial Services, Inc.<\/p>\n 480-895-0611<\/p>\n","protected":false},"excerpt":{"rendered":" We live in challenging times, but when has anything ever been smooth sailing?\u00a0 The financial markets are aware of outstanding issues in the world, and collectively price them in accordingly.\u00a0 That\u2019s why the surprises (both good and bad) have the tendency to result in overshoots of market reaction.\u00a0 For example, despite Tuesday\u2019s \u201ccrisis,\u201d markets wereRead more<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[],"class_list":["post-677","post","type-post","status-publish","format-standard","hentry","category-finance"],"_links":{"self":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/677","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/comments?post=677"}],"version-history":[{"count":1,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/677\/revisions"}],"predecessor-version":[{"id":678,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/posts\/677\/revisions\/678"}],"wp:attachment":[{"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/media?parent=677"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/categories?post=677"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dev.sunlakesofarizona.com\/blog\/wp-json\/wp\/v2\/tags?post=677"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n\n
\n Period ending 11\/4\/2011<\/strong><\/td>\n \n \n \n DJIA<\/td>\n \n \n \n S&P 500<\/td>\n \n \n \n Russell 2000<\/td>\n \n \n \n MSCI-EAFE<\/td>\n \n \n \n MSCI-EM<\/td>\n \n \n \n BarCap Aggregate<\/td>\n \n \n \n\n
\n Interest Rates<\/strong><\/td>\n \n \n \n \n \n \n 12\/31\/2010<\/td>\n \n \n \n \n \n \n 10\/28\/2011<\/td>\n \n \n \n \n \n \n 11\/4\/2011<\/td>\n \n \n \n \n \n