The preponderance of the economic and market-related news skewed to the negative last week, with an additional earthquake in Japan, rising oil prices, an interest rate hike by the European Central Bank (ECB), escalating debt problems in Europe and increasing noise about the since-averted potential federal government shutdown. Despite this backdrop, however, US equities remained resilient and were roughly flat last week.
Rising oil prices clearly represent a potential risk to global economic growth and to the ongoing bull market in equities. Much of the recent rise in oil prices can be attributed to an increased event-risk premium added to markets by investors and speculators based on widening turmoil in the Middle East rather than to a change in real supply and demand dynamics. Our expectation is that oil prices should come back down when geopolitical risks ease. Of course, no one knows when that might happen, meaning that short-term risks will likely keep oil prices elevated for now.
The news last week that the ECB raised rates did not come as a surprise, but it nevertheless makes for a more difficult credit environment. The rate hike, in our view, increases the potential risks of a “hard landing” among some of the euro-area debt issues and adds to the near-term uncertainty in global markets.
Also in the news last week, of course, was the potential of a government shutdown, which was narrowly averted by a last minute compromise on Friday evening. During all of the debates over the last weeks and months, it has become clear that dialogue is focused not on whether to cut spending but by how much to cut and where. It appears that lawmakers are gearing up for some real entitlement and tax reform. We are skeptical whether there is a chance of actual legislation being passed before the 2012 elections, but there will certainly be a lot of talk about it.
It seems that, at least so far, US markets have been relatively immune to all of the ongoing negative macro issues, and investors would be right to question why that is. Our answer would be that the fundamentals of improving economic growth and accelerating corporate earnings have outweighed the negative risks. From an economic perspective, the United States has now been through seven consecutive quarters of recovery, and although credit issues remain, consumers, corporations and even banks have all been contributing to a healthier economic backdrop. It also looks like employment may have turned the corner, which will go a long way toward helping the economy transition into a self-sustaining expansion. The earnings backdrop has also been solid, which has helped stocks produce impressive returns to date.
From our perspective, this trend of short-term risks being less important than stronger longer-term fundamentals is likely to continue. We would not be surprised to see some sort of consolidation in equity markets (particularly if oil prices remain elevated) but we also believe that equities continue to look attractive compared to bonds and cash.
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Martone Capital Management, Inc.
William A. Martone - President - CLU, ChFC
Michael C. Martone - Registered Principal
50 Main Street - Suite #1000 White Plains, NY 10606
Telephone: (914) 682 - 2151 Fax: (914) 682 - 2166
Toll Free: (877) 682 - 2151
William Martone is President and Senior Portfolio Manager of Martone Capital Management, Inc., which was founded in 1994. Bill has 38 years of experience in the financial services industry and manages portfolios for both individual investors and pension funds using multiple investment strategies. Bill is a Chartered Financial Consultant, Chartered Life Underwriter, and New York State Registered Investment Advisor. He is frequently quoted in the Westchester Journal Business News as well as other publications. Martone Capital Management was featured on CNNfn.
*The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. All expressions of opinions are subject to change without notice. Martone Capital Management, Inc. does not believe this information alone is reasonably sufficient upon which to base an investment decision.