A Mid-Quarter Update: June 2012
Throughout the month of May, the global financial markets have reacted strongly to the unresolved financial issues in the European Common Market and the continuing weakness in our domestic markets.
The political and economic instability in Greece could potentially result in Greece defaulting on their outstanding debt, and their withdrawal from the European Common Market and the Euro Zone. On the home front, Unemployment Data for the month of May was disappointing and may indicate a slowdown in our economic recovery.
We would like to share our insight about these events, its impact on a sustainable recovery, and a market perspective.
Greece and the Euro Zone Nations
The effects of Greece defaulting on its debt and exiting the Euro Zone would be felt on multiple fronts.
Greek bondholders would lose their investments, resulting in heightened financial discomfort across all bondholders and the Euro Nations. A lack of confidence among investors is likely to deter any new investment in Greece, and would require Greece to offer a higher yield to attract new investment dollars. The European Central Bank would most likely be asked to provide emergency loans to Greece and to buy new bonds issued by Greece to help the country to recapitalize. In the event these efforts were to fall short, Italy and Spain may have difficulty meeting their debt obligations, and a worst-case scenario might then unfold.
U.S. exposure to a downturn in the EU economies could be felt both in our financial and corporate relationships with Europe. The US dollar would likely become a “safe haven” for foreign investors, strengthening it further against the Euro. Demand for our products would presumably lessen as EU consumers reduce their spending and US exports become more costly for Europeans. U.S. banks will work to hedge their financial exposure appropriately, and should they be unsuccessful, the potential for a credit freeze may disrupt the US financial sector once again.1,2
We may see a more positive outcome for Greece. Election polls show the national sentiment is in favor remaining with the European Union. Greece could elect a government that meets the requirements outlined by the European Union and the International Monetary Fund, which would provide the funds needed to maintain the stability of Greece’s economy. Providing that the necessary injections of capital are made by Germany, France, Italy, and Spain to prevent Greece’s default, a period of stabilization and economic adaptation could ensue.3
US Employment
May’s unemployment data distressed Wall Street as payroll gains were less than most Economists had anticipated. Reuter’s reported in its poll of Economists, that most analysts expected a payroll gain of 150,000 new jobs in the month of May. The unemployment figures released reported only 69,000 new jobs were created and all were related to part-time positions. This report increased the national unemployment rate to 8.2% and the Labor department issued a downward revision of the March and Aprildata to a total gain of 49,000 new jobs.1,2
The unemployment data that was released has investors considering the potential of a slowing economic recovery. As investors come to grips about the US jobs front, the Federal Reserve will need to examine its policy and consider and announce additional easing at its summer policy meetings. 4,5
Market Perspective
To provide perspective, the S&P 500 has experienced periods of rapid growth and decline throughout the recovery period that began in March of 2009. The periods of decline were driven by a variety of economic conditions including; rising oil prices, the downgrading of U.S. debt, and the financial situation developing in Europe.6
The S&P 500 chart to the left shows the S&P 500 index has returned 89% since March 9, 2009, and the periods of decline have paled in comparison to the rallies.6,7
While it is often challenging for many investors to remain committed during periods of market volatility, it is important to recognize the ability of markets to rally despite pressing economic issues. Investors often lose by leaving the market during periods of volatility, whereas investor gains during these same periods are the primary result of maintaining suitable asset allocation during market volatility and then participating in the growth cycles that generally follow.
We welcome your insights and are available to discuss on an individual basis. Please call or email with any questions or to schedule a time to speak.
1. www.csmonitor.com/USA/Latest-News-Wires/2012/0514/Greece-s-economic-woes-may-hurt-US [5/14/12]
2. www.cnbc.com/id/47562567 [5/25/12]
3. www.msnbc.msn.com/id/47635074#.T85aB7C0yBQ [5/31/12]
4.money.msn.com/market-news/post.aspx?post=109dd732-6daa-4f8a-b878-a8ee80dd9aba [6/1/12]
5. www.cnbc.com/id/47645265 [6/1/12]
6. Standard & Poor’s, J.P. Morgan Asset Management., Weekly Market Recap [6/4/12]
7. Chart Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. , Weekly Market Recap [6/4/12]
All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards.
S & P 500 Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S & P 500 Index serves as a benchmark for U.S. Large Company Equities.