Economic growth suggests stocks will continue to outperform bonds 20 November 2012 Stocks Again Falter on Fiscal Cliff Fears Equities slipped yet again last week as investors remain focused on the upcoming US fiscal cliff set to take effect at the beginning of 2013. Of course, some softer economic data and rising concerns over conflict in the Middle East did not help matters. For the week, the Dow Jones Industrial Average fell 1.8% to 12,588, the S&P 500 Index declined 1.5% to 1,359 and the Nasdaq Composite dropped 1.8% to 2,853. Since the US election on November 6, the S&P 500 has slid 5%, indicating that investors remain highly anxious about the path forward. Chances for an 11th-Hour Solution? The question of whether or not the fiscal cliff will be avoided is impossible to answer with any degree of certainty, but the political reality does indicate that some sort of compromise may be possible. Both the election results and current polls suggest Republicans are more likely to be blamed if no deal is reached. At the same time, it is clearly in President Obama’s interests to reach a resolution. As such, most politicians appear motivated to find some sort of middle ground. The two sides still appear to be quite far apart on some important issues (particularly regarding a potential tax increase for higher-income Americans), but the parties are at least attempting to avoid brinksmanship. Despite Risks, Stocks Still Attractively Positioned Investors are understandably focused on the near-term risks of the US fiscal cliff, weakness in the global economy and escalating geopolitical conflict, all of which are driving volatility higher. However, from a fundamental perspective, stocks remain attractive. The combination of decent valuations, easy monetary policy, low inflation and still-positive economic growth suggests stocks will continue to outperform bonds over the next 12 months. Bonds Core bonds were in demand as the eurozone slipped to a third-quarter contraction. German 10-year yields touched their recent lows of 1.31% early in the week, before prices declined marginally to leave the yield at 1.33% at the end of the week. Spain’s 10-year bond yields rose for the fourth consecutive week, pushing the yield to a six-week high, as the government refrained from asking for aid from the ECB. Overall, the Merrill Lynch Over 5 Year Government Bond Index was 0.2% higher over the week, bring it close to 13% year-todate.
Eurozone recession Economic growth in the 17-nation area dropped for the second consecutive quarter, leading it into a technical recession. The economy contracted by 0.1% in the third-quarter, following a 0.2% contraction in the previous three months. Individually, the German economy expanded marginally, but the Spanish economy showed no such improvement as it contracted for the fifth-straight quarter. Greece Greece was granted an additional two years to reach its budget-deficit goals under the bailout program. European finance ministers will be discussing ways of plugging the funding gap at its next meeting. Currencies Having initially weakened against the euro, the US dollar strengthened as the week progressed as investors sought safe-haven assets amid concern that talks to avert the fiscal cliff will stall. The â‚Ź/$ rate was unchanged on the week, finishing at 1.27. Oil The West Texas oil price rose towards the end of the week on optimism over the US budget talks and fears that increased tension in Israel could affect supplies from the Middle East. The price finished the week almost 1% higher at $86 a barrel. Source. Blackrock, Bloomberg, Zurich Investment Managers, Aviva Investment Managers & FT.com