Despite the S&P 500 finishing 2011 right where it started, the media and most financial pundits have been fixated on increased volatility being a new fixture of the market. However, like the first week of 2012, this was another quiet one. Contrary to the longer term trend, news out of Europe was marginally better than that of the U.S. Spanish and Italian debt sales were considered successful, but U.S. employment numbers disappointed. The Euro continued its decline anyways.
- Monday – Alcoa kicked off earnings season with better than expected results, including a prediction for a global deficit in aluminum supply for 2012.
- Tuesday – Chinese import growth was reported at a two year low. Stocks rose on expectation China would ease monetary conditions due to slower economic activity.
- Wednesday – Germany’s statistics office unofficially said the country’s economy shrank 0.25% in the fourth quarter.
- Thursday – Spain and Italy each sold over 10 billion euros of debt at lower than expected rates, easing concern of immediate funding problems.
- Thursday – The European Central Bank left its interest rate at 1%, and provided a more upbeat outlook for the region’s economy than it had in recent months.
- Thursday – US jobless claims rose by 24,000 – more than expected. Also, retail sales rose just 0.1% in December, less than expected.
- Friday – Standard and Poor’s cut their credit rating on France and Austria from AAA to AA+. Finland, the Netherlands and Luxembourg were put on negative watch.
S&P 500: 1,289 (+0.9%)
MSCI EAFE: +0.9%
US 10 Year Treasury Yield: 1.86% (-0.10%)
Gold: $1,639 (+1.4%)
EUR/USD: 1.268 (-0.3%)
News was mixed, but the Euro continued its steady decline against the dollar. Globally, the flight to quality continues, as evidenced in the bond and currency markets. That equity markets rose against that backdrop with relatively low volatility is a minor positive. We don’t view the European credit downgrades as significant because they have been talked about for months. The market speaks much louder than the credit rating agencies. Right now it’s telling us the crisis in Europe is far from over, but not unfixable. The exception may be Greece – interest rates suggest the 50% haircut outlined by Germany and France won’t be the worst of the eventual restructuring. It seems more and more likely Greece will have to exit the Euro. If so, it will cause significant economic disruption, but the surprise factor in equity markets should be minimal.