We had a little flush of activity in the first quarter, which we believe will lead to much better GDP – potentially well over 3% – than people anticipated in the beginning of the year. We look at this activity as a little bit of a catch-up, for a couple of reasons: (more…)
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Like a lot of people, I’m electioned out and glad it’s over. In a recent conversation with political strategist Greg Valliere we discussed the country’s biggest hurdle now: the fiscal cliff, where automatically programmed spending cuts and tax increases meet at the end of the year. It’s front and center for Congress to get a deal done, and Republicans and Democrats face a complicated set of negotiations and compromises to make that happen. Greg thinks it will be an extraordinary period of “introspection, reflection, naval gazing and finger-pointing.” That’s a given, of course – but I do see some light on the horizon.
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The big surprise of Tuesday’s outcome is that the estimated $6 billion spent in support of elections across the country resulted in no change in the composition of the government. We have the same president. The House is still controlled by Republicans and the Senate is still controlled by Democrats. The Republicans fell short of expectations by losing ground in the Senate.
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Last week Chairman Bernanke and the Fed launched another aggressive stimulus program, QE3, saying that they will buy $40 billion in mortgage debt per month and continue to purchase assets in order to boost growth and reduce unemployment. He also announced that the Fed is not likely to raise rates from the current rock bottom lows until at least mid 2015, vs. 2014 as previously stated.
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It’s long been a concern of mine that many fixed income investors turn to indexed or index-like portfolios without knowing a principal risk: their exposure to government bonds at a time when debt levels are increasing and interest rates are at 60-year lows comes at the expense of owning other types of corporate bonds that might better serve their investment needs.
Often a core fixed income investment takes the form of an indexed or index-like portfolio based on the Barclays Capital U.S. Aggregate Index, one of the most widely used measures of the “broad” U.S. investment grade bond market. Over time, however, as government borrowing increases, the index’s proportion of government holdings increases in order to reflect the investable universe. We view this as a risk and one more reason why an active, value-based multi-sector approach may be a better way to invest. 
(more…)
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Despite a steady stream of negative headlines and high volatility, markets are holding up pretty well. The broadest measure of the stock market, the S&P 500 Index, is up nearly 13% year-to-date through today, August 13, 2012. The NASDAQ is up almost 17%. High yield bonds are up almost 9.7% while investment grade corporate bonds have gained over 7%. Even Europe has managed 7.5%, as measured by the FTSE Eurofirst 300 Index in dollar terms.
Especially interesting are corporate bonds. They’re basically at their lows for the year in terms of both yields and spreads. In fact, after starting the year at around 725 basis points over Treasuries, high yield bond spreads are about 600 basis points over Treasuries today. Investment grade spreads started the year at about 257 basis points over Treasuries, and now are around 190. Investment grade bond yields are around 3%, High Yield bonds around 7%. (more…)
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I had another interesting conversation with Greg Valliere the other day. Greg is the Chief Political Strategist for the Potomac Research Group and a frequent CNBC political commentator. He believes Congress’s inattention to the fiscal cliff is “breathtakingly irresponsible” for creating uncertainty among people, the economy and corporations. Who can disagree?
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The first half of 2012 turned out to be pretty good for returns, despite the rollercoaster ride. We started out strong, had a fairly severe correction, but by the end of the second quarter, both the stock and bond markets were actually up. The S&P 500 finished the first half up more than 9%. It’s clear the U.S. economy lost the good momentum it had in the first quarter and seems to have stabilized at a lower level. Everyone is aware of the “fiscal cliff” in Europe. But while there are still many unresolved problems, I believe the bad news is pretty much priced into the market. Of course, if Spain defaults or another major unexpected event happens, it’s back to the drawing board. But, again, a lot of the tail risk is well known. So what now? (more…)
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Most recessions are functions of a normal business cycle; this recession was a financial crisis marked by defaults by individual, business, and even government borrowers. Still, the U.S. economy is growing. It may be slow growth, but it is enough growth for the unemployment rate to fall from 8.5% to nearly 8%, and likely to below 8% later this year. (more…)
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