The beginning of 2012 has given the stock markets two gifts: the reduced risk of a bank meltdown in Europe and prospects for an acceleration of global economic growth. Global manufacturing appears to have reaccelerated in December and we expect upcoming measures of activity in January to show a continuation of this trend.
We continue to believe that an increased focus by both domestic and foreign investors on the United States bodes well for the stock market’s potential to extend gains as we go through the year. There remain risks, especially in Europe, but we are encouraged by the impact of the three-year loans provided by the European Central Bank (ECB) in its first long-term refinancing operation (LTRO) on December 21. By stepping in as a lender of last resort for banks, the ECB diminished the risk of another banking system collapse by easing the liquidity crisis (though not the solvency problems of many countries).
Following the Federal Reserves’ most recent meeting where they extended the time period that rates are likely to be exceptionally low through “at least late 2014,” they published explicit forecasts for short-term rates, how long they expect them to remain at record low levels, and when they may start to raise rates again. We appreciate improved communication, but are slightly concerned that making such specific forecasts may tie their hands, biasing the Fed to stick with their forecasts, rather than quickly react to ever-changing conditions.
For now, monetary policy remains unabashedly accommodative and will continue to be for some time. This provides some measure of certainty to businesses looking to potentially borrow to expand business. For homeowners with mortgages, do not delay refinancing knowing that rates will remain low for quite some time. Refinance today!
Congress has returned from its holiday recess. In an election year, it’s traditionally tough to get much done; and with today’s level of contention, even more so. Serious problems still need to be dealt with and the election results will go a long way in determining the course of the country in the coming years, but any substantial action will likely be on hold until 2013.
Caution and a well-diversified portfolio are still in order as the future remains uncertain and US Treasuries continue to trade near record low yields, indicating continued concern among investors. For those who depend on fixed secure income investments, there seems to be no relief in sight and yields on CD’s and bonds will remain low. This may temp some investors to reach for higher returns in the stock market, but don’t take any unnecessary risks or you will not get a good night sleep for a while.
