The Fed (meeting this week) and Your Weekly Update

This Week's Quote:
"I guess I should warn you: if I turn out to be particularly clear, you've probably misunderstood me." ~ Alan Greenspan, former chairman of the Federal Reserve


J.L. Davis Thoughts This Week:

When the Federal Reserve and Chairman, Ben Bernanke speak later this week, lots of folks are wondering if the Fed will change its economic projections. We think this is highly unlikely.

As well, the fundamental operations of the Federal Reserve seem somewhat set. The Fed is still cheerfully printing money so that they can purchase roughly $40 billion or so of US long-term treasuries while issuing the same amount of short-term treasuries. The stated objective is to reduce long-term interest rates. They’re already at historic lows, as we all know.

While that may be helpful to the economy, particularly the housing market, there are those who argue the housing market would recover all by itself, as would the economy. Regardless, home building is accelerating as is home buying, according to recent statistics.

In terms of interest rates, it seems unlikely there will be any change, as the Fed has previously indicated that short-term rates will remain the same through 2014, which are effectively approaching zero. So, if nothing will really change, where are we supposed to be making money on our investments?

A quick look at mutual fund flows shows that substantial monies are still moving into retail bond mutual funds, possibly at a clip never seen before based on the last 12 months.* Returns in these types of funds have been very good. Interestingly, though, they have generally been exceeded by the returns from equity-based mutual funds.**

So the answer for 2012 is that many investors have been making money in lots of places including real estate, stocks, bonds and the like.

Going forward with the uncertainty of dividend and capital gains tax rates due to the “fiscal cliff”, stocks could see some selling due to repositioning and other factors. This has been evidenced in recent weeks with some fairly significant volatility. Short term volatility seems to forever be the price of longer term gains.

So our view is simple; stay the course. Keep portfolios invested. Stay carefully balanced, making sure the investments are attuned to your goals and risk tolerance. And one more thing: we still like what we see.

Expect a muted confirmation of the same from the Fed.***

*ICI information, mutual fund flows, 12/10/12
** Bloomberg, index returns, 12/10/2012



Market Week: December 10, 2012

The Markets

The tech-heavy Nasdaq suffered from a drop in Apple's stock. However, other indices managed small gains for the week as investors tried to balance anticipation of any potential Santa Claus rally with uncertainty about fiscal cliff talks in Washington.


Last Week's Headlines

• The unemployment rate continued to fall in November, hitting its lowest point since December 2008. Hurricane Sandy had minimal impact, but the addition of 148,000 jobs and an increase in the number of people halting job searches cut unemployment to 7.7% from 7.9%. According to the Bureau of Labor Statistics, that's a full percentage point lower than a year ago.
• U.S. manufacturing contracted for the fourth time in six months, according to the Institute for Supply Management, whose manufacturing index fell to 49.5% in November (any number below 50 indicates contraction). However, the ISM's measure of the services sector for November grew for the 35th straight month; the 54.7% reading showed growth increasing more rapidly than in October.
• The Census Bureau reported that construction spending rose 1.4% in October and was nearly 10% above October 2011. A 3% increase in private residential construction played a large role in October's growth, though nonresidential construction also was up by 0.3%.
• Greece offered to pay private bondholders anywhere from 30% to 40% of face value (depending on maturities) to buy back sovereign bonds in order to reduce its debt burden, and extended its deadline for a response until Tuesday, December 11. Greece needs a successful buyback program in order to receive its next installment of financial aid.


Eye on the Week Ahead

The Fed will issue its most recent forecasts for the economy, while the clock continues to tick on discussions about the fiscal cliff that will help determine the accuracy of those forecasts.

Key dates and data releases: balance of trade (12/11); Federal Open Market Committee meeting/forecasts, import/export prices (12/12); wholesale inflation, retail sales, 30-year Treasury bond auction (12/13); consumer inflation, industrial production (12/14).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis*** and Broadridge Investor Communication Solutions, Inc. Copyright 2012