Market Digest – Week Ending 1/20

in Market Commentary by

[dropcap]F[/dropcap]ourth quarter earnings are in full swing and the trend is generally positive with multiple industry bellwethers besting expectations. US economic news was also upbeat with improving home builder sentiment and lower weekly jobless claims. The combination led the S&P 500 to a solid gain despite the shorter four-day week and relatively flat performance on Friday. News out of Europe was positive with a string of successful debt auctions driving a rebound in the Euro and stocks strongly upward. But it was Emerging Markets that posted the largest weekly gain, as slowing growth in China fueled speculation of easing monetary policy.

Weekly Returns

S&P 500: 1,315 (+2.0%)

MSCI EAFE: (+4.7%)

US 10-Year Treasury Yield: 2.03% (+0.17%)

Gold: $1,667 (+1.7%)

EUR/USD: 1.294 (+2.0%)

Major Events

  • Monday – US markets closed for Martin Luther King, Jr. Day.
  • Tuesday – China’s fourth quarter GDP growth slowed to 8.9%, supporting speculation the country will ease monetary policy.
  • Tuesday – Yahoo’s co-founder Jerry Yang officially resigns from board, ending his 17 year relationship with the company.
  • Wednesday – Goldman Sachs reports better than expected earnings and US homebuilder confidence comes in ahead of estimates.
  • Wednesday – Greece resumes talks with creditors after last week’s negotiations broke down.
  • Thursday – Multiple earnings reports exceed expectations and weekly US jobless claims hit lowest level since 2008.
  • Thursday – The Euro further strengthened against the dollar following successful bond sales in France and Spain.
  • Friday – US existing home sales increase 5% in December—the third month in a row.
  • Friday – Despite weaker demand in Europe, GE reports better than expected fourth quarter profit.

Our Take

This was undoubtedly a positive week. With improving US economic data and low market expectations, we continue to believe a majority of corporate earnings will surprise to the upside. Europe remains the biggest question mark, although successful debt auctions (at lower yields) are encouraging. Given last week’s European downgrades, the market is once again making clear its opinion of credit rating agencies.

Greece remains in the spotlight with its ongoing debt negotiations. But we don’t believe Greece is big enough, or enough of a surprise, to cause a bear market in 2012. However, it may yet drive another freak-out and possible correction. Greece has a 14.5 billion euro payment scheduled for March 20, which will be tough to make. The most publically discussed solution so far involves a “voluntary” haircut of 50% for private investors. However, the Greek one year bond is trading at a 390% yield. This implies many debt owners will have to take much larger losses than 50%. More importantly, it opens the door for disagreement on the final solution and a “messy” default. An unorganized default would be disruptive to an already fragile global economy and anemic European lending market. The fear of possible ripple effects could be enough to spike market volatility as the deadline approaches. It is way too soon to predict such an outcome, but it is worth watching.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
Craig Birk, CFP®

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