Trees Don’t Grow to the Sky

Be sure to see my U.S. News and World Report column from last Friday for an extension of thoughts from last Monday’s Off The Wall blog found here.

The rally in the equity markets came to a close last week as stocks sold off on the continued turmoil in Libya and the corresponding increase in oil prices.  Stocks finally broke their 3 day losing streak on Friday as Saudi Arabia raised output of crude oil to offset fears of reduced supply out of Libya and a strong U.S. consumer confidence report was released.

We’ll be watching the markets as we get closer to March 4^th, which is when Congress should decide (or not) on a continuing resolution for extending funding for the current fiscal year.

If the government were to shut down, the worse case (and an extreme) would produce defaults on U.S. government debt; however we think this is unlikely.   A more probable scenario is one where we see the deadlock settled with some modest spending cuts.  This could rattle the markets over the short-term, but we do not see this as anything Congress would allow to continue at the expense of the current economic recovery.

The equity markets we track were all down last week.  The Dow Jones Industrial Average (DJIA) lost -2.10% to finish at 12,130, the S&P 500 Index lost -1.72% to finish at 1,320 and the Nasdaq Composite Index lost -1.87% to finish at 2,781.  The Russell 2000 index, which tracks the performance of small capitalization stocks, lost -1.54% to finish at 822. 

Lost in the news (and, frankly, in the market action) last week was the downward revision of 4Q 2010 GDP.   The key drivers to the revision (down from 3.2% to 2.8%) were lower consumer spending alongside state and local government spending.  This week, look for reports on manufacturing and employment.

While there is plenty of sun shining through the cloud cover, some clouds do exist.  Besides the news of unrest in the Middle East – which, let’s face it, has been “news” for as long as I can remember – there is the concern of commodity prices, particularly gas.  The boost we are seeing from interventions like QE2 and the reduction in payroll taxes are going to subside over the rest of 2011.  Unless the U.S. recovery/expansion becomes self-sustaining, these clouds could dump some rain on the economic parade.  Look for GDP forecasts to start getting cut if we see commodity and gas prices stay high. 

However, there may be a rainbow as well.  Emerging Markets are still a source of growth and elected officials in the U.S. have all the incentive in the world to make sure 2012 is a solid year heading into elections.  Corporate balance sheets still look strong with a much higher percentage of cash on their balance sheets than usual, adding to the probability (hopefully) that dividends increase and merger & acquisition activity picks up as well.

Call us for help or if you have any questions. 

Securities and Financial Planning offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC

**Standard Compliance Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly.  Stock investing involves risk including loss of principal.  The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. The Standard & Poor’s 500 Stock Index (S&P 500) is an unmanaged capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The NASDAQ Composite Index measures all domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. The Russell 2000 Small Stock Index is an unmanaged index generally representative of the 2000 smallest companies in the Russell 3000 Index.  The Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.