Weekly Market Digest — Week Ending 12/02

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[dropcap]A[/dropcap]fter a bleak Thanksgiving week, markets rallied hard. Once again, the Fed and other central banks proved they have the power to put a floor under the market. Announcement of a coordinated plan to make dollar funding cheaper for European banks sparked a 4.3% rally in the S&P 500 on Wednesday. It was not the only positive driver for the week. China announced it would lower its reserve requirement, Black Friday retail numbers exceeded expectations, US unemployment dropped, and most importantly, plans began to materialize for the IMF to be used as a conduit for the ECB to lend money to troubled nations.

Major Events:

  • Monday – European leaders began to hint at a potentially groundbreaking fiscal pact aimed at keeping the Euro intact and encouraging fiscal responsibility.
  • Monday – Stocks rise on a rumor the IMF will lend hundreds of billions of euros to Italy, but the IMF denies it.
  • Tuesday – American Airlines files for bankruptcy.
  • Wednesday – Central banks around the globe announced a coordinated plan to make dollar funding cheaper for European banks.
  • Wednesday – The People’s Bank of China indicated it was loosening monetary policy after it said the reserve requirement ratio for banks will be lowered by 0.5 percentage point.
  • Wednesday – Private-sector jobs in the U.S. rose by 206,000, according to Automatic Data Processing and consultancy Macroeconomic Advisers, which came in well ahead of the 130,000 gain economists had expected.
  • Thursday – US Manufacturing numbers came out strong, as the Institute for Supply Management’s factory index increased to 52.7 last month from 50.8 in October.
  • Friday – Recent GOP frontrunner Herman Cain said he is considering ending his campaign as he faced the latest allegation of sexual indiscretion.

Our Take:

German Chancellor Angela Merkel, reluctantly, has perhaps become the most important person in the global economy. While still too soon to issue a verdict, it is beginning to seem we should consider ourselves lucky. With our own politicians continuing to demonstrate they are unwilling to stand up and fight for what they believe is right (or even admit when they are caught blatantly wrong), Merkel is walking a fine line in an attempt to create a stronger, viable European monetary union. The markets and many of her neighbors are screaming for her to let the ECB print unlimited Euros to bail out Italy and Spain.

Meanwhile, domestic political pressure is mostly against the notion. Her actions this week, more than ever, clearly suggest that she will allow the ECB to be the savior. But only after Europe comes together with bold new agreements that promote fiscal responsibility and reduce the odds of a mere “temporary” ECB led solution –one that does little more than fuel inflation. At least for this week, the markets seemed happy with the progress. The Fed taking action to help European banks indicates the ECB won’t be alone in its efforts to avoid disaster.

U.S. economic news was resoundingly positive. Unemployment dropped much more than expected. With the Fed having thrown so much gasoline on the fire in the last three years in the form of forced low rates and increased liquidity, we can’t help but wonder how it will react if the economy surprises to the upside in 2012. The shift could be rapid. Bond holders should be diligent.

Image used under Creative Commons by user World Economic Forum.

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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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