Market Digest – Week Ending 12/16

in Market Commentary by

[dropcap]T[/dropcap]he market pattern around Europe’s debt crisis resolution efforts has been to buy the rumor and sell the news. Once again, equity markets were disappointed with the direction of the Dec. 9 political agreements to promote fiscal responsibility. The currency markets also chimed in, with the Euro dipping below the key $1.30 level for the first time since January. The combination of a rising dollar and increased concerns of recession in Europe and a slowdown in China led to a drop in gold, oil and most other commodity prices. Treasuries rose as a flight to safety.

Weekly Returns

  • S&P 500: 1,220 (-2.8%)
  • MSCI EAFE: -5.3%
  • US 10 Year Treasury Yield: 1.86% (-.21%)
  • Gold: $1,597 (-6.7%)
  • EUR/USD: 1.3035 (-2.5%)

Major Events

  • Monday – Intel cut its sales forecast, citing a shortage of disk drives after the flooding in Thailand.
  • Tuesday – The Fed policy meeting did not result in any new stimulus measures – stocks fell.
  • Tuesday – U.S. retail sales rose 0.2% in November, below most estimates.
  • Wednesday – Bernanke tells Republican senators the Fed has no plans to aid European banks.
  • Thursday – IMF managing director Christine Lagarde says the European crisis is escalating.
  • Thursday – U.S. jobless claims fell by 19,000, to the lowest level since May, 2008.
  • Thursday – FedEx reported higher than expected earnings, a positive sign for U.S. economic activity.
  • Thursday – Research in Motion announced lower than expected sales and profits and said its next-generation Blackberries will be delayed until the second half of 2012.
  • Friday – Online game company Zynga raised $1 billion in its IPO, the largest for an internet company since Google.
  • Friday – Consumer prices in the U.S. were unchanged, easing short-term inflation fears.

Our Take

Many may regret it, but Euro members made a conscious decision to get financially married when they signed the Maastricht treaty 20 years ago. Now some are finding their spouses to be less than fiscally responsible. The first step in such a situation is to have a tough talk and try to create some type of budget. But from there, a marriage means you either have to support your partner or go through a costly divorce. You can’t just sit by and watch your spouse file for bankruptcy.

The Euro may break apart down the road, but there isn’t time to do it in an orderly manner now. Europe must do whatever it can to prevent Italy and Spain from spiraling into default. A lot has already been done, but there will be more if necessary. Ultimately, there is no other choice.

Last Friday’s European summit agreement was mostly about implementing fiscal discipline, or to say it differently, austerity measures for less responsible countries. Austerity alone is not a solution for a region that faces not only excessive debt, but also slowing growth. Our feeling was that the agreement was largely political maneuvering designed to clear the way for the ECB to become more vocal about its intention to backstop Italian and Spanish debt needs. However, rhetoric out of the ECB this week indicated they are in no rush to print Euros in order to buy bonds. This disappointed capital markets, but we continue to believe the ECB is now positioned to act more boldly when it feels the time is right. In the meantime, heightened volatility will remain.

Image used under Creative Commons by Flickr user Images_of_Money.

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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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