Investors stirred again by rumblings from Europe

Chief Market Strategist David Joy’s commentary this week highlights the renewed investor attention being paid to the Eurozone.


David Joy

Chief Market Strategist, Ameriprise Financial

"Monday's episode should serve as a reminder that relative calm can easily evolve into complacency, a dangerous condition for investors in such an uncertain and still fragile economic recovery."

After an extended period of relative calm in European markets, investors received a stark reminder this week that risks do, indeed, remain. On Monday, equity markets in the Eurozone slumped sharply and bond yields rose, as political uncertainty in Italy and Spain jolted investors.

Spanish stocks fell 3.8 percent on Monday alone, and have shed 7.6 percent in just the past three trading sessions, amid concerns that Spanish Prime Minister Mariano Rajoy may be implicated in a corruption scandal. The yield on ten-year Spanish sovereign bonds climbed 25 basis points during the same interim. In Italy, stocks fell 4.5 percent on Monday and have declined 7.6 percent in the past four trading sessions, as polls indicate an increasingly competitive upcoming national election that could vault former Prime Minister Silvio Berlusconi back into power, and risk the unwinding of fiscal reforms accomplished during the technocratic administration of Mario Monti. Ten-year bond yields rose 30 basis points.

Markets in both locales rallied on Tuesday, restoring a sense of calm, after less bad economic data in the Eurozone and decent earnings reports. But Monday's episode, and that of the previous few sessions, should serve as a reminder that relative calm can easily evolve into complacency, a dangerous condition for investors in such an uncertain and still fragile economic recovery.

U.S. stocks also got nicked on Monday from the fallout in Europe, and are also recovering on Tuesday. Yet, we are reminded of the political risk that remains here at home, with approaching deadlines for the sequestered spending cuts on March 1 and the continuing budget resolution a few weeks later. Despite these potential uncertainties, stocks have enjoyed a strong start to the year, as the S&P 500 surged 5.0 percent in January, its best monthly return since October 2011. The index is just a few percentage points from its all-time high of 1565. The Dow Jones Industrial Average is even closer to its previous high of 14,164 although it has so far been able to close above 14,000 for only one day. According to Lipper, equity mutual funds attracted positive asset flows for the fourth straight week through January 30. The $20.7 billion four week cumulative total was the largest since April 2000. But, before this is cited as evidence of the so-called great rotation, it should be noted the flows from both taxable and tax-exempt funds remain positive as well. Perhaps, more accurately, the evidence suggests a cumulative rise in overall risk appetites, rather than the repudiation of one asset class in favor of another.

Bonds have endured a more uneven return experience to start the year. The Barclays Capital Aggregate Bond Index posted a -0.7 percent return in January. Barclays’ Intermediate Government Index lost 0.4 percent, as the yield on the ten-year Treasury rose 23 basis points during the month. The long government index dropped a considerable 3.5 percent. However, not all bond market segments suffered declines. The Barclays High Yield index delivered a positive total return of 1.3 percent for the month, as the lowest quality below-investment grade bonds bolstered the sector's returns. The municipal bond index also posted a positive return of 0.4 percent, as buying interest resumed in the wake of the fiscal cliff deal that spared tax-exempts from tax limitation, at least for the time being. That status may still be at risk, however, as budget negotiations heat up once again with a range of preferences presumably on the table.

With just three weeks to go before the automatic cuts are scheduled to take effect and some members of Congress fully expecting them to happen, investor sensitivity to political risk will likely shift back from Europe to the U.S. And, despite evidence of improving economic fundamentals and a good earnings season, the trends of higher equity prices and higher bond yields in January may stall in the days ahead, until this next political crisis passes.

Important Disclosures:

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Dow Jones Industrial Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.

The Barclays Capital U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays Capital Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indices are rebalanced monthly by market capitalization.

The Barclays Capital Intermediate Government Index is an unmanaged index comprised of all publicly issued, non-convertible domestic debt of the U.S. government or any agency thereof, or any quasi-federal corporation and of corporate debt guaranteed by the U.S. government. Only notes and bonds with minimum outstanding principal of $1 million and minimum maturity of one year and maximum maturity of ten years are included.

The Barclays Capital Long Government/Credit Index measures the investment return of all medium and larger public issues of U.S. Treasury, agency, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities longer than 10 years. The average maturity is approximately 20 years.

The Barclays High Yield Index covers the universe of fixed rate, non-investment grade debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, and 144-As are also included.

Barclays Capital Municipal Bond Index: Is a market-value-weighted index for the long-term tax-exempt bond market. To be included in the index, bonds must have a minimum credit rating of Baa. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their maturity date.

It is not possible to invest directly in an index.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

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