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Million Dollar Question: Dollar and Recession Risk Up Together
by Liz Ann Sonders of Charles Schwab,
Recession fears have mounted, but the picture is still mixed and it's not yet conclusive.
The US dollar is winning the "least ugly" currency contest, but isn't helping stocks or commodities.
Short-term, a stronger dollar is a negative for riskier assets but not necessarily longer-term, if history's a guide.
Schwab Market Perspective: Perception vs. Reality
Economic data continues to reveal sluggish activity, and markets have been increasingly trading in a risk-on, risk-off mode. The Fed continues to try to stimulate greater economic growth, most recently with the announcement of operation twist. We have serious doubts this will engender any broad upturn. We continue to look toward Washington to move beyond short-term rhetoric and provide some serious long-term plans that allow businesses to have more confidence in the future. European policymakers continue to delay any real action, increasing the risks of an escalation of the debt crisis.
Fed Extends Maturities
Fed Notes-The TwistObservations and takeaways on the Fed's two day meeting this week.
Bank Bondsplus Extraordinary Calls on Trust Preferred SecuritiesWe elaborate on factors affecting the banking sector.
Obama Bill Questions Exemption on Muni bondsOur view on one piece of the job proposal presented by the Obama administration.
Liquidity- Ignore at Your PerilWe highlight some reasons why liquidity, especially in volatile markets, is an important investment factor.
Twist and Shout: The Fed, as Expected, Announced "Operation Twist"
by Liz Ann Sonders of Charles Schwab,
The Federal Reserve announced "Operation Twist," which was largely expected.
The goal is to further reduce borrowing costs and push money via lending out into the real economy.
Whether it will work is the big question because high interest rates are not the economy's problem.
Ultimately, confidence has to improve before we're likely to enjoy any reasonable pace of economic growth. Whether this move by the Fed starts the confidence-healing process remains to be seen. But we suggest you keep your expectations relatively low.
The End of the Line: Eurozone Crisis Hits Tipping Point
The growing likelihood of debt default by Greece rocks markets and sentiment.
Although the banking system is healthier today than it was in 2008, contagion risks are elevated.
The grand experiment of a unified currency in Europe is facing its greatest test yet.
Schwab Market Perspective: What's Next?
The economic debate continues between the recession and slow growth camps. We lean toward the latter but the argument may be just splitting hairs. The more important issue is what this sideways movement may mean for the market and jobs growth. There seems to be more disagreement among Fed members than we've ever publicly seen. Theyve laid out potential further stimulus but we believe their effects are likely to be limited. The European crisis continues to fester and some hard choices may need to be made sooner rather than later. Slowing European economies however, could help emerging markets.
1/2 Full: Not Throwing in Towel on Recession Probability
by Liz Ann Sonders of Charles Schwab,
Double-dip recession chatter is highly elevated, but I think we'll scrape by without one. Leading indexes are giving conflicting signals. Recession or not, growth will be weighed down by debt and lack of confidence. Let me state right up front that even though I'm not in the recession camp, risks that there will be one have risen markedly. A good deal of that risk relates to the breakdown in confidence triggered by the debt ceiling-related political antics, the subsequent downgrade of US debt by Standard & Poor's, the ongoing debt crisis in the eurozone and a highly volatile stock market.
Confidence Counts
Most of the normally historically-telling leading indicators continue to point to the US avoiding a recession. However, risks are clearly heightened as continued erosion of confidence could push perception into reality. The Fed continues to be divided on whether to attempt further monetary stimulus. We question if any efforts will have the desired impact. The Obama Administration and Congress continue to scramble to be seen as doing something to help, but also have limited policy options. European policymakers seem oblivious to the erosion of confidence.
Volatility Continues: Are the Markets Overreacting?
Selling pressure was heavy today as European banking fears combined with soft economic data. Risks have grown, but not all is in the negative column and markets may be overreacting.
Interest rates are near record lows, indicating to us a growing concern about growth and a search for safety.
Investing can be nerve-wracking in environments such as this, but we believe sticking with a well-devised long-term plan continues to be the best course of action.
Return to Recession.or Recovery?
by Liz Ann Sonders of Charles Schwab,
Soft economic data has caused talk of a return to recession to grow, leading to a return to the risk-off trade and a spike in volatility. We believe these fears and the market reaction are overdone and indicators still point to growth, but risks are high. The chorus calling for a new quantitative easing (QE3) program from the Fed has grown. We believe it's unlikely at this point. The European debt crisis continues to damage investor confidence as policymakers appear to be consistently behind the curve. Meanwhile, the economic slowdown could ultimately help emerging markets.
Panic Is Not a Strategy - Nor Is Greed
by Liz Ann Sonders of Charles Schwab,
Originally published in 2008, it's time for a refresher about the perils of panic.
Asset allocation, diversification and rebalancing are as close to a "free lunch" as you can get as an investor.
ThIn world where time horizons have shrunk precipitously, think longer-term.
Breaking Commentary: Fed Gains Disappear
Stocks fell sharply again today, continuing the extreme volatility seen recently.
Concerns over the state of the financial industry in France drifted into the United States, contributing to the sell-off.
Confidence appears very fragile right now and investors should use this volatility to judge their level of risk tolerance and adjust long-term allocations as appropriate.
Disappearing Act: GDP Loses Steam
by Liz Ann Sonders of Charles Schwab,
Although the debt deal remains top-of-mind, the latest GDP report's weakness didn't ease the angst.
The economy is now operating at "stall speed" and is at a crucial inflection point.
There's not much good news other than corporate profits, which have boomed.
Let's Make a (Debt) Deal and Crush the Market
by Liz Ann Sonders of Charles Schwab,
Today was about fundamentals, both here and in Europe. We got yet another batch of limp economic news today with weak personal income and spending; while we're still hung over from last week's hit to GDP growth for the first half of this year, and all of the recession's era. As a refresher, GDP barely grew at 0.4% in the first quarter and grew a paltry 1.3% in the second quarter. It didn't help that the S&P 500 crossed below its 200-day moving average, which often begets additional selling by the technically-inclined traders.
Shifting Focus
Some economic indicators are starting to perk up while corporate earnings have been strong as we wind down reporting season. Stocks will move higher in the coming months once confidence is restored. Whatever the near-term outcome of the debt debate, the US still has deficit issues to deal with and hard choices must be made to ensure economic stability for years to come. Europe finally arrived at their debt deal, but it likely falls short of what will eventually be needed. Meanwhile, China is key to emerging market performance and continues to deal with inflationary concerns.
On Your Mind: The Debt Ceiling, US Credit Rating and Potential Default
by Team of Charles Schwab,
We are disappointed in the continued inability of Washington to resolve the current short- and long-term debt issues. However, we do not believe now is the time to make major portfolio adjustments given US companies' continued strong earnings reports, few signs of a double-dip recession, and few signs that the bond market currently questions the fundamental ability of the US to pay its bills. Be prepared for more volatility as the political negotiations continue. Watch the VIX index for upward spikes indicating that investors are losing patience.
On Your Mind: Debt Ceiling and the US Dollar
by Team of Charles Schwab,
The uncertainty surrounding the upcoming decision on the debt ceiling has been a negative factor for the dollar. A US default and/or a downgrade of the US credit rating would almost certainly be negative also. It could weaken confidence in the dollar and cause it to fall. However, there are many global factors driving demand, including support of Japan and China, which continue to be large holders of US Treasuries. It would not be in their interest to sell dollar-denominated assets, including Treasuries, if there was simply a rating change or short-term default.
Staring at the Ceiling
by Liz Ann Sonders of Charles Schwab,
Everyone's focused on the debt-ceiling negotiations, impacting everything from market action to consumer confidence.
Default remains unlikely, but investors are wondering about portfolio positioning in the event the unthinkable occurs.
Behind the scenes, the news isn't all bad, as some economic readings and most corporate earnings releases have been pleasant surprises.
Earnings Heat Up
Earnings season is heating up and will provide a status update on the "soft patch" and where companies' confidence level lies. Stocks have been more volatile but are they telling us something about potential future direction? Debt ceiling talks continue in Washington, with a deal still likely to come in the final days before the supposed August 2 deadline. The make-up of spending cuts, tax changes, and any entitlement reform may be key to longer-term market reaction. Contagion fears are growing in Europe and solutions are difficult to come by.
On Your Mind: Debt Ceiling and the US Dollar
by Team of Charles Schwab,
Theres been a lot of media attention on the US debt ceiling and the outlook for the US dollar. Here we'll answer some of the questions weve been receiving from clients. The US debt ceiling: What are the chances of the U.S. defaulting on its debt? Will the United States automatically default if the debt ceiling isnt raised? When can we expect a resolution? What will happen if the United States does default? What does this mean for investors? Outlook for the US dollar: Is there a risk of the dollar collapsing in the short term? Is the world going to abandon the dollar as a reserve currency?
Sparks: Are Stocks Telling a Better Story For the Second Half?
by Liz Ann Sonders of Charles Schwab,
Investors continue to focus on the macro ? but the micro is telling a much better story.
There was lots of good micro and macro news last week.
Is the market's rally sending a signal that the second half of the year is looking up?
Expert Roundtable on Interest Rates
by Mark W. Riepe, Liz Ann Sonders, Kathy A. Jones, Rande Spiegelman & Brad Sorensen of Charles Schwab,
US short-term interest rates have hovered near zero percent for a record period of time. The Fed has kept the funds rate extremely low, not only to boost economic growth, but also to ward off the threat of a deflationary spiral. Given the economy's recent soft patch, we don't expect the Fed to raise rates too soon. But, at some point rates will rise, it makes sense for clients to start planning now. With this in mind, Mark Riepe, led a roundtable discussion of investment and debt strategies for both the current low-interest rate environment and a future point when rates begin to tick up.
Schwab Market Perspective: Dealing with Debt
Global governments are dealing with rolling debt crises equaling shaky investor confidence. We are concerned that many of the solutions weigh on growth prospects, but are hopeful about short-term resolutions that restore business confidence and lead to more investment and hiring. The Fed continues to hold steady, keeping short rates near zero and likely reinvesting maturing Treasury securities after QE2 ends. Greece passed the austerity package required to get short-term funding but much more is needed. And while the focus has been on Europe, it may be time to focus on the Asian region.
Heartbreaker: Soft Patch Hits Stock Market
by Liz Ann Sonders of Charles Schwab,
We remain in the soft patch versus double-dip recession camp, believing a lot of the weaker growth has been from temporary factors.
Investor sentiment has become decidedly pessimistic? a contrarian positive for stocks.
Market breadth also shows the market at extremes typically followed by a bounce.
Pause or Panic?
Economic data has deteriorated to the point that talk of a double dip recession has returned. The risk of another recession is low as most indicators remain well in expansion territory. Several factors are contributing to a soft patch, but a rebound is likely in the latter part of 2011. Along with talk of recession risk, chatter about the need for QE3 by the Fed has increased. The bar is quite high for QE3, but it is very likely the Fed will not let its balance sheet shrink in the near-term. Global growth is decelerating as well, with China tightening and Japan dealing with reconstruction.
Some Days (Months) Are Better Than Others
by Liz Ann Sonders of Charles Schwab,
May was a rough month for investors, though it ended on a sunnier note. A growth slowdown is evident, but the debate rages about whether its factors are temporary. We think May's risk-off mode is easing, but choppy action remains likely until longer-term worries subside. After an uphill ride in April, when the Dow was up 4%, May wasn't kind to investors, although the last two trading days brought some sunshine. It was the first time in nearly three years that the S&P 500 index had no up weeks in a month.
Expert Roundtable on Risk
by Mark W. Riepe, Liz Ann Sonders, Randy Frederick, Rob Williams, & Brad Sorensen of Charles Schwab,
The word "risk" has a negative connotation-something to steer clear of whenever possible. However, in the investing world, risk and performance are intertwined. Market sentiment can shift quickly depending on economic or political news, geopolitical events and even natural disasters and these shifts can sometimes send investors fleeing for safety or taking on more risk as they seek higher returns. Mark Riepe, led a roundtable discussing the concept of risk in investing, strategies for reducing portfolio risk, and investment suggestions tailored to both risk-seeking and risk-averse investors.
Schwab Market Perspective: Shifting Sentiment
Economic headwinds are causing growth expectations to be reevaluated, resulting in choppier action in a majority of asset classes. The Fed is moving steadily closer to ending its purchases of Treasuries but we dont believe its a major event. Normalization of monetary policy still seems slow in coming, although we believe QE2 ending on schedule is nearly certain. Europe's debt crisis continues to plague the eurozone. Solutions appear to be limited and agreement is still anything but assured. Meanwhile, China's slowdown is also weighing on investors.
Breakdown: Commodities Tumble ? For Good?
by Liz Ann Sonders of Charles Schwab,
'When in doubt, get out' has become the mantra for commodities traders the past couple of weeks. Sentiment had become too one-sided (and may need to ease even further). Is risk-on, risk-off trading finally coming to an end, and can fundamental analysis prevail? We've written a lot about the 'risk-on, risk-off' trading environment prevalent over the past several years. Risk on is basically when investors have been feeling better about the global economy and about the markets, so they buy and embrace more risky assets. Then, when fears rise investors essentially avoid all risk?risk off.
Market Turbulence Increasing
We are entering a traditionally tough period for the market and economic data has been raising questions about the sustainability of the recovery. While still optimistic on the longer-term outlook, there could be more choppiness in the near term as markets adjust to a changing environment. The Fed continues to buck the global trend by maintaining loose monetary policy, which contributed to a weaker dollar. But lately the dollar has gotten a lift as QE2 comes to an end, contributing to a rout in commodity prices.
Schwab Market Perspective: Making Sense of a Mixed Bag
Earnings season is winding down and is largely positive and CEO confidence is high. This points toward a continued improving labor outlook but could mean more grinding in the stock market. Housing remains moribund but the market seems to be largely dismissive. A ratings warning on US debt rattled the stock market but bond markets were relatively unmoved. Issues need to be addressed, but they are more likely to affect money flowing into the economy and highly unlikely to result in failure to pay obligations. Meanwhile, the Fed is striving to communicate more effectively-but about what?
The Fed Meets the Press
by Liz Ann Sonders of Charles Schwab,
The Fed's meeting ended with no surprises on rates or outlook.
But the first-ever news conference added some clarity, context and transparency to the Fed's thinking.
The Fed has just begun its long process toward monetary policy normalization?and that's a good thing.
Inside Information
Earnings season gives an 'insider' look at economic growth. Businesses see and react to changes in the economy before the broader macro data show a clear trend. The Fed has floated some trial balloons about reining in its extremely accommodative policies, the time for which is overdue. Budget issues remain a problem at all levels of government, but likely wont derail the recovery at this time. Despite ongoing debt problems in peripheral European nations, the ECB hiked interest rates. Europe still faces significant issues that make it more likely to underperform other areas of the world.
Concerned About Inflation?
by Brad Sorensen of Charles Schwab,
Inflation has become a bigger topic of discussion among investors and in the media as of late. While we have noted in numerous publications that we don?t believe inflation is a near-term concern due to a number of factors, investors are wondering how to position themselves should inflation start to take hold. First, despite common perception, gold has not historically been a very good hedge against inflation. Due to the possibility of gold prices being a bit extended after the recent run, we don't recommend gold as an investment for those concerned about inflation.
When Doves Cry: Debates Rage About QE2's Finale
by Liz Ann Sonders of Charles Schwab,
Will the Federal Reserve's quantitative easing (QE2) pull into the dry dock in June as intended? If so, what are the implications for stock and bond investors? Might the Fed begin tightening policy before many think?
Expert Roundtable on Inflation: Should You Be Worried?
Inflation is a rise in the general level of prices of goods and services; your money buys less. With oil and other commodity prices rising, the Federal Reserve's current easy monetary policy and the economy picking up, many investors are worried about inflation. Mark Riepe, head of Financial Research and president of Charles Schwab Investment Advisory, led a roundtable discussing why Wall and Main Street may have different perspectives on inflation. The roundtable also covers our inflation outlook, ways to protect your investments and inflation-savvy investments you might want to consider.
Above the Fray
Attacks on Libya and recovery efforts in Japan have dominated the headlines, but behind the scenes US economic growth remains solid and we remain optimistic on the stock market. Commodity prices have backed off a bit and the Fed is likely to see QE2 through to its June 2011 end. Of particular concern is the unwillingness or inability for Congress to agree on a budget that addresses the growing deficit issues in the US. Japan has a significant debt burden with which to deal as it rebuilds, while Europe is struggling to come up with a comprehensive plan to deal with the eurozone debt crisis.
Tilting Toward Energy
by Brad Sorensen of Charles Schwab,
Despite dramatic current events impacting markets, tactical shifts to your energy-sector allocation could add a small performance boost over the next several months. Volatility will likely remain elevated as events unfold in the Middle East and recovery continues from the devastating disaster in Japan. For investors looking to make shorter-term, tactical adjustments to a portfolio.
Focus on Japan Overshadows Fed Decision
by Brad Sorensen of Charles Schwab,
To no one's surprise, the Fed kept interest rates at near zero and maintained its scheduled purchases of Treasury securities (also known as quantitative easing, or QE2). We're growing more concerned that the Fed is keeping interest rates low for too long, leading to potential problems down the road. With the market currently reacting to the tragedy in Japan and the ensuing market volatility, it's important to avoid acting hastily.
Volatility on the Rise
Geopolitical unrest and rising inflation concerns have conspired to increase market volatility. We remain bullish on US stocks and believe that this recent increase in consternation will ultimately be healthy for stocks. The US government keeps kicking the debt can down the road, while the Fed seems unconcerned about inflation and is intent on completing QE2. We believe changes are needed at both entities to foster sustainable economic growth. The European debt crisis is bubbling up again, while the ECB is talking interest-rate hikes. Future growth depends on the path of both issues.
Moment of Surrender: Regimes Fall, Oil Prices Spike
by Liz Ann Sonders of Charles Schwab,
Geopolitical tensions swell along with oil prices, pushing the stock market lower. The absence of a longer-term oil- supply shock suggests the price spike could be short-lived. Consumers will take a hit, but the broader economy should avoid a double-dip recession.
Worry ... Friend or Foe?
Interest rates have moved higher, inflation concerns are growing, debt issues remain and global tensions are heightened. All valid concerns, but in our opinion not enough to derail stocks?although they could potentially in the future. Violence in the Middle East and North Africa is creating tension in global markets, but there are other concerns for emerging markets as well. Europe is becoming a bifurcated situation, with investors distinguishing between those with debt issues and those without.
Food Chain: Do Spiking Food Prices Warn of Generalized Inflation?
by Liz Ann Sonders of Charles Schwab,
Food inflation has heated up and has incited global unrest. But for now, it's unlikely to become a monetary phenomenon. Investors should expect geopolitical risk to stay elevated in 2011, with implications for emerging markets performance.
Balancing Act
Strong US economic signals and solid earnings continue to provide a positive backdrop for stocks. We expect pullbacks if optimistic sentiment gets too elevated, but remain optimistic about the stock market. Inflation concerns are rising, but the Federal Reserve is unlikely to react with tighter policy. There's not much it can do to fight commodity inflation, but Treasury yields are rising in response to headline inflation, even with little near-term risk of companies passing on rising costs.
Back in Black: Economy Moves to Expansion From Recovery
by Liz Ann Sonders of Charles Schwab,
Real GDP moves from recovery to expansion, but growth remains below potential. Inflation concerns globally replacing double-dip recession concerns as key theme in 2011. Egyptian unrest and rising volatility could further temper optimism, which could bring back the "wall of worry" the stock market likes to climb.
Schwab Market Perspective: Confidence Climbing
Although still relatively low, confidence is returning to businesses and consumers. We believe this confidence is well-placed and could portend healthy gains for the economy and the market as the year matures. Risks remain: commodity prices are rising, housing is still moribund, and federal and local governments have severe fiscal budget crises to deal with. Confidence in developed international markets is still lagging.
The Fed Sticks to the Status Quo
by Liz Ann Sonders of Charles Schwab,
The Fed announced no changes to its interest rate and quantitative easing round two (QE2) policies. There were no dissenters, with two new voting members changing their tune about QE2. The risk is growing that the Fed will stay easy too long, which could have implications for bond yields (and bond investors).
House of the Rising Sun: A Check-Up on Housing
by Liz Ann Sonders of Charles Schwab,
Housing is becoming less national and more regional in terms of strength/weakness. Affordability is up but so are foreclosures. Employment remains key to housing, but be aware of housing's diminished impact on the economy.
Further Fuel?
Stocks may be vulnerable to a near-term pullback thanks to elevated sentiment, and earnings season could provide an impetus for some profit taking. The economy appears to be strengthening and we remain optimistic. Despite signs of growth, the Fed seems insistent on letting QE2 play out, pointing to continued high unemployment and housing. The new congress also has to deal with these issues, while attempting to pare deficit spending. International exposure is important, but we recommend taking some profits and rebalancing if your emerging-market exposure gets above your target allocation.
Glory Days: Another Good Year in 2011?
by Liz Ann Sonders of Charles Schwab,
Setting targets doesn't make sense to us, but we do believe in reading the market's tea leaves, and the outlook is healthy. However, frothy sentiment has us a little concerned in the very near-term. Investors need to be mindful of complacency, but also to make sure they're not still loaded up on bonds?a major capitulation from bonds to stocks is possible.
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