by Shawn Narancich, CFAVice President of Research
A Three-Year Old Bull Friday marked the three-year anniversary of the low in U.S. stock prices precipitated by the financial crisis. Despite the fact that the U.S. economy supports five million fewer jobs than it did in the spring of 2009, GDP is at record levels and the stock market has more than doubled since then. That we experienced the year’s first substantial decline this week is only fitting, given the turmoil associated with that volatile period. On Wednesday, lingering uncertainty about the Greek debt situation and a reduction in China’s targeted growth rate were the catalysts for investors to take profits, driving the Dow 204 points lower. The sell-off proved short-lived, with investors heartened by news of strong private-sector payroll gains reported first by ADP and later confirmed by the Labor Department’s monthly payroll tally. Technology held up well in Tuesday’s sell-off and remains the best performing sector of the market year-to-date.
Greece. . . Ad Nauseam The world’s largest sovereign default became official as Greek bond investors approved a debt restructuring that eliminates over 50 percent of its principal obligations, extends debt maturities and reduces the interest rates on this debt. The agreement was forged by hook or by crook, with Greece triggering collective action clauses that forced holdouts into accepting the deal. What followed was a ruling that by the International Swaps and Derivatives Association that will trigger payments on $3 billion of credit default swaps owned by certain holders of Greek debt. Despite the stock market’s initial swoon on this news, the money center banks that underwrote these policies should be able to make the payments without incurring meaningful hits to capital.
Going to Work Manufacturing job creation more than offset job cuts in the government sector to produce a net non-farm payroll gain of 227,000 in February. This was also accompanied by upward revisions that boosted both the December and January numbers previously reported. Despite the constructive jobs report, growth in the labor force caused the unemployment rate to remain lodged at 8.3 percent. Meanwhile, the January trade picture reported Friday was not so good. The U.S. trade deficit rose to the highest level since fall of 2008 and chastened economists who might otherwise be tempted to boost their first quarter GDP numbers amid a preponderance of strong economic reports.
A Dubious Distinction The dust surrounding the European Central Bank’s most recent monetary stampede has settled and what has emerged is the world’s largest central bank balance sheet, now sized at a cool 3 trillion Euros. Judged relative to the size of the European economy, it amounts to over 30 percent of GDP, eclipsing the U.S. Federal Reserve’s 2.8 trillion dollar balance sheet, which represents about 20 percent of our economy. The ECB’s Long-Term Refinance Operation was clearly successful in alleviating the funding pressure on European banks (in the short-term), but investors are right to question the long-term repercussions of unwinding this unprecedented stimulus in the event that inflation rears its ugly head. As the late Milton Friedman famously noted, “There’s no free lunch.”
Corporate news flow has lightened with the unofficial end of earnings season, but investors will be fed a new diet of economic news to chew on next week, including February inflation numbers, retail sales and industrial production. We remain attuned to this data and company updates surfacing from the conference season now in full swing.