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David Joy: Price correction? Not so far

Chief Market Strategist David Joy analyzes the recent performance and outlook for markets in the U.S., Europe and China.

 

The S&P 500 rose last week for the sixth straight time, and although the 0.3 percent increase was the slowest of the year, the gain extended the market's streak of having risen every week of the new year. That it was able to rise at all was a notable achievement against a backdrop of rising political uncertainty, and widespread expectation of at least a modest price correction after the strong start to the year. Friday's close left the index at its highest level since late 2007, and a new recovery high.

It will be politics that dominate the news flow this week, except in the case of China. Markets there are closed for the week-long Lunar New Year celebration, leaving a void of fundamental data, and creating distortions that will last for weeks.

In Europe, domestic political uncertainty in Italy and Spain has raised investor anxiety levels, and caused markets to pull back. In Italy, the polls have tightened in the national election that is just two weeks away, creating uncertainty over the makeup of the new government and its commitment to fiscal and structural reform. The yield on its ten-year note rose 22 basis points last week to 4.54 percent, its highest since mid-December. In midday trading this Monday, the yield had climbed further to 4.60 percent. Stocks have dropped in each of the past two weeks for a cumulative decline of 6.2 percent. In Spain, accusations of corruption within the ruling party have resulted in a climb in sovereign ten-year note yields of 16 basis points last week, to 5.34 percent, up sharply from the mid-January low of 4.86 percent. Similar to Italy, the yield climbed another six basis points by midday Monday. And similarly, stocks have also declined for the past two weeks, falling 6.3 percent. The re-emergence of political risk has caused Eurozone-wide equity averages to drop and trim their gains year-to-date. The Euro Stoxx 50 index has fallen 4.2 percent in the past two weeks. On Thursday, the Eurozone forth quarter GDP report is expected to show a contraction of 0.4 percent, its third straight decline.

In the U.S., the economic calendar is relatively light, leaving politics to fill the void. January retail sales and industrial production top the list of scheduled releases, and both are expected to have slowed modestly. The political calendar will be dominated by President Obama’s State of the Union address on Tuesday evening. The speech is expected to focus, in part, on the need for budget reform, as the sequestered spending cuts are scheduled to take effect in just two weeks, with little apparent opportunity for compromise before then.

The Congressional Budget Office estimates that if the sequester does take effect as scheduled, the fiscal 2013 budget deficit would fall to $845 billion, or 5.3 percent of GDP. It would be the first deficit below $1 trillion in five years. And yet, federal debt held by the public would still climb to 76 percent of GDP. In terms of economic activity, the CBO estimates a drag of 1.25 percent of GDP from the combined effects of the sequester cuts, the expiration of the payroll tax cut, and the tax increases in calendar 2013, resulting in full year growth of just 1.4 percent.

Lastly, currency policy concerns are increasing. Fearing that competitive devaluations could prove destabilizing, the G-7 is reportedly drafting a statement ahead of the upcoming G-20 meeting at week's end saying they won't target exchange rates. Apparently, Japan is worried that it might be singled out for criticism. Their concern might be well placed. The yen has depreciated by a stunning 20 percent against the dollar since the start of October, and by 25 percent against the euro, amid political pressure for easier monetary policy. During this time, the Nikkei stock index has risen 26 percent in yen terms, but only 5.6 percent in dollars and just 1.8 percent in euros. But you won't hear any complaining from big Japanese exporters.

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 Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.

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.

© 2013 Ameriprise Financial, Inc. All rights reserved.

 

 

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