September 25, 2013

Lather-Rinse-Repeat

We're going to do it...We're going to do it...We're not going to do it...Yet.

Last week, the U.S. Federal Open Market Committee gave stock markets a gift that, on a scale of thrills, might have been on par with Marilyn Monroe singing happy birthday to JFK. On Wednesday, the FOMC announced (without a trace of breathiness):

"Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month."

The ensuing euphoria pushed many of the world's stock markets higher. The Dow Jones Industrial Average set a new record, Germany's DAX closed at a new high, and Japan's Nikkei delivered its best performance in eight weeks. Emerging markets also reaped positive benefits.

The Quantitative Easing or QE-sugar buzz abated when St. Louis Fed President James Bullard told Bloomberg the Fed may decide to begin buying fewer bonds at its next meeting in October. This surprised some as analysts already had predicted itwouldn'thappen until December which caused markets to slump a bit last Friday.

It's possible that, by mid-October, the Fed's 'lather-rinse-repeat' commentary on quantitative easing may have become background music for another event that has the potential to deliver a macroeconomic jolt: the U.S. congressional debate over the debt ceiling.

Data as of 9/20/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	1.3%	19.9%	17.1%	14.4%	7.2%	5.3%
10-year Treasury Note (Yield Only)	2.7	NA	1.8	2.7	3.8	4.2
Gold (per ounce)	2.3	-20.3	-23.3	1.8	8.7	13.4
DJ-UBS Commodity Index	-0.8	-7.7	-12.3	-2.5	-6.7	0.8
DJ Equity All REIT TR Index	2.3	6.5	8.4	12.3	7.2	10.2

Dependence on China There's some good news and there's some bad news... The good news is the rate of global gross domestic product (GDP) growth increased during the second quarter, according to The Economist. Greater economic strength in developed countries helped push the world's GDP 2.4 percent higher during the second quarter of 2013 as compared to the second quarter of 2012. That's only the third time that has happened in three years. The bad news, according to The Economist, is:

"The world is dangerously dependent on China... Since the beginning of 2010 it alone has contributed over one-third of global GDP growth, with another 40% coming from the rest of the emerging world. Weighed down by debt since the financial crisis, the rich world's growth has been sclerotic. Excluding America, it has provided just 10% of global growth since 2010; America has contributed another 12.5%."

China's GDP has been growing at a pretty fair pace although the rate of growth has slowed. Forbes reported China's GDP grew at an annualized rate of 7.5 percent during the second quarter of 2013, falling just short of first quarter's 7.7 percent growth. The slowdown was expected. China is rejiggering its economy in an effort to stimulate domestic demand and consumer spending rather than continuing to rely on investment-driven growth.

Here's another tidbit to consider. Forty percent of the world's growth has been attributable to emerging markets (ex-China). Changing expectations for U.S. monetary policy have interrupted the flow of capital into those markets.

The Economist'sCapital Freeze Index, which assesses the vulnerability of emerging markets to a freeze in capital inflows, found that nine of 26 emerging countries examined are at relatively high risk of this happening. That has the potential to affect the world's GDP growth rate, too.

Weekly Focus - Think About It

"Our prime purpose in this life is to help others. And if you can't help them, at least don't hurt them."

—Dalai Lama, spiritual leader of Tibet

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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