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Volatility Returns to Market; Simpson & Bowles Present New Tax Plan

Market Digest – Week Ending 2/22

After an extremely docile month, volatility returned to the market after Fed minutes showed increasing concern about the long term effects of stimulus measures. Some officials suggested bond buying should be reduced before the job market is back to “normal”. The S&P 500 suffered its first weekly loss of the year, but it was modest, down just 0.3%. Economic news was mixed, with mostly positive data in the US and mostly negative data in Europe. Treasuries gained. Gold fell 1.9% and is now down 5.6% for the year.

Weekly Returns:

S&P 500: 1,516 (-0.3%)

MSCI ACWI ex-US: (-0.2%)

US 10 Year Treasury Yield: 1.97% (-0.04%)

Gold: $1,579 (-1.9%)

USD/EUR: $1.318 (-1.3%)

Major Events:

  • Tuesday – Alan Simpson and Erskine Bowles presented a plan to rewrite the tax code and cut spending in an attempt to find common ground between Democrats and Republicans.
  • Tuesday – The FBI launched a criminal investigation into suspicious options trades made on Heinz prior to it being acquired. The move continues a trend of increased enforcement against insider trading.
  • Wednesday – The Federal Reserve released minutes of its January 29-30 meeting. They showed some officials are increasingly concerned about unintended consequences of the current stimulus program and may seek to reduce or eliminate bond purchases earlier than previously expected. Stocks and gold fell.
  • Thursday – HP reported declining revenues and sales, but the results were better than expected. Shares rose.
  • Thursday – The Index of US Leading Indicators rose 0.2% in January, suggesting the economy is on track to sustain expansion.
  • Thursday – Euro-area manufacturing contracted more than expected.
  • Friday – German business confidence rose to a ten month high.
  • Friday – The European Commission lowered its Eurozone growth forecast for 2013 to -0.3%.
Our Take:

“There are known, knowns; there are things we know we know. We also know there are known unknowns; that is to say, we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know.”

                                                      -Former United States Secretary of Defense, Donald Rumsfeld

Rumsfeld’s awkward quote provides an accurate description of the potential unintended consequences surrounding massive Fed (and central banks globally) stimulus since 2009. Fed minutes released this week marked the most significant public acknowledgement by Fed officials of potential risks. Some officials introduced the notion of reducing bond purchases sooner than had been expected. It is a good thing that more open discussion is beginning.

At some point, bond purchases will have to be greatly reduced. This should cause interest rates to rise – it is mostly a question of when and how much. The uptick in market volatility this week represents a blip compared to what may occur when markets are forced to deal head on with a serious stimulus reduction. We can imagine both bullish and bearish outcomes to stimulus reduction, but believe the Fed would be wise to choose a path that is well telegraphed and methodical. If Mr. Bernanke comes to the same conclusion, incremental slowing of bond purchases or increases in short term rates may come sooner than most anticipate.

In Europe, Italy will hold general elections on Sunday and Monday. It is widely viewed as choosing among the “least worst”. A stronger than expected showing by former Prime Minister Silvio Berlusconi or former comedian Beppe Grillo (neither of whom are strong supporters of the Euro) could make it difficult for the government to continue with necessary reforms and may spark another flight from Italian debt. Stay tuned.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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