The major macro economic event of the past week came on Thursday morning, when the European Central Bank (ECB) unveiled its much anticipated quantitative easing program. Starting in March, the ECB will buy roughly €60 billion a month in a mix of government and other bonds on the secondary market until at least September of 2016. The bond-buying may actually last longer if the ECB is unable to boost inflation expectations, which is a key goal of this initiative. The program includes buying European agencies and sovereign bonds, and it complements the current programs the ECB already has in place.
European stocks continued their advance on Friday while U.S. stocks turned moderately lower as earnings and economic data came back into focus.
For the week, the S&P 500 added +1.6%, the Dow Jones Industrial Average gained +0.92%, and the MSCI EAFE (developed international) moved +2.64%.
Here are the 3 stories this week that rose above the noise:
Goldman Sachs Says Stay Invested in U.S. Stocks
Despite the six-year run in U.S. equities and current valuations sitting at the high end of historic norms, Goldman Sachs private bank continues to recommend that U.S. clients invest 80 percent of their assets in U.S. investments. Sharmin Mossavar-Rahmani, chief investment officer for Goldman Sachs private bank, expects the Fed will begin raising rates by mid-2015, however this alone will not signal the end of the bull market, as the S&P 500 has historically peaked 18 months after the Fed starts raising rates.
Interestingly, Mossavar-Rahmani believes that Japanese and European equities are attractive tactical plays given their cheap valuations and the potential benefits from Bank of Japan and European Central Bank monetary stimulus. While this weekend’s Greek election raises a red flag, Mossavar-Rahmani doesn’t believe that Europe’s rising populist parties will lead governments for an extended period.
Greece Chooses Anti-Austerity Party in Major Shift
An article from The New York Times provides a good summary of the Greek election results on Sunday that saw the anti-austerity Syriza party win a decisive victory. Despite a potential showdown over the terms of Greece’s bailout package, market reaction to the election results has been muted with last week’s European Central Bank announcement of a large quantitative-easing program soothing investors’ concerns over risks of a renewed financial crisis.
There are two reasons the Syriza party victory in Greece is important for investors. First, its leader Alexis Tsipras has a clear mandate to negotiate an easing of austerity imposed by Brussels and the International Monetary Fund and to write off at least some of the country’s massive public sector debts. Second, the victory is significant since younger, anti-austerity parties are on the march all over Europe, with anti-austerity movements in Spain, Italy and Portugal also gaining traction.
If Syriza were to win its negotiations with the rest of the Eurozone, these other anti-austerity parties would look more credible to voters. So why aren’t investors in a state of frenzied panic? The most likely reason is that many believe reason will prevail and Berlin will sanction a write-off of Greece’s excessive debt. Here’s an important point: outside of Germany, it is almost impossible to find an economist or central banker who believed the previous reconstruction of Greece was ever going to work. Uncertainty over the future direction of the Eurozone is likely to remain a source of volatility for global asset markets in 2015 and beyond.
Yes, a Northeast Blizzard Can Slow U.S. Economic Growth
Severe winter weather can negatively impact economic growth, especially when snowstorms hit a heavily populated area with a lot of economic activity. New England is dealing with a blizzard this week and if economic activity is slowed for even a short period of time, the impact may be seen in first-quarter GDP data. Last year, unusually harsh winter conditions resulted in a 1.4 percent reduction from first quarter GDP growth, according to economists at Macroeconomic Advisors.
Payroll growth also slowed in the first quarter of 2014. Harsh winter conditions negatively impact the economy in the near term, but often result in an economic rebound when the weather improves, as seen last year. The U.S. economy grew by 4.6 percent annualized in the second quarter, following a sharp contraction in the first quarter, displaying that economic activity was delayed and not eliminated because of severe weather.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
