Looming Fiscal Cliff, European Recession and Mideast Violence Pull Stocks Lower

in Market Commentary by

Market Digest – Week Ending 11/16

Fears surrounding the Fiscal Cliff, official recession in Europe, and violence in the Middle East pulled stocks down for a second straight week. Apple, which plays a critical role in the performance and sentiment of so many fund managers and individual investors, is down about 25% from its September peak. The S&P 500 is down around 7% in the same period. Treasuries rose this week, receiving a boost from Fed minutes revealing support for expanding asset purchase programs. Gold fell.

Weekly Returns

S&P 500: 1,360 (-1.4%)

MSCI EAFE: (-1.3%)

US 10 Year Treasury Yield: 1.58% (-0.03%)

Gold: $1,713 (-1.0%)

USD/EUR: $1.274 (+0.2%)

Major Events

  • Monday – Microsoft’s Halo 4 took in more than $220 million on its first day on sale.
  • Monday – Jefferies Group agreed to sell itself to Leucadia for $2.48 billion.
  • Tuesday – The David Petraeus adultery probe widened as Obama put on hold his nomination of Marine General John Allen as commander of the North Atlantic Treaty Organization. General Allen is accused of sending inappropriate emails with a Florida woman.
  • Wednesday – Israel killed Hamas’s military leader on the Gaza Strip and threatened to send in ground troops if rocket attacks continue.
  • Wednesday – Minutes from the October Fed meeting revealed that some officials support expanding bond purchases after the expiration of Operation Twist at the end of December.
  • Thursday – Q3 GDP for the Eurozone contracted 0.2%, officially entering recession.
  • Friday – Tension in the Middle East rose as Hamas missiles landed near Jerusalem and Tel Aviv, and Israel extended its bombing of the Gaza Strip.
  • Friday – House Speaker Boehner said he had constructive talks with Obama on the budget and would accept government revenue increases coupled with spending cuts. Stocks rose.

Our Take

Being Chairman of the Federal Reserve is a tough job.

Last February, in an attempt to get Congress to act on upcoming tax increases, Mr. Bernanke coined the term “Fiscal Cliff”. Since then, he has been pulling out all the stops in an effort to drive up housing prices and the stock market. Now it seems the simple phrase itself may be responsible for at least part of the recent market declines.

We suspect the current level of fear would be much lower, and the selling pressure reduced, if the media was discussing the impending “deficit reduction package” instead of the “Fiscal Cliff”.

Friday, President Obama met with congressional leaders including House Speaker Boehner. They deemed the talks “productive”. Every elected politician in Washington knows the American people want action and compromise, but their recent track record is not encouraging. We continue to believe little will be accomplished to avert the Fiscal Cliff before New Year’s. But we still see potential upside as compromise is reached next year and investors realize worries about the cliff are exaggerated.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as the 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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