Market Commentary - 4.12.12 The Economic and Market Balance SheetEvery morning we all tend to follow the same routine. We shut off the alarm clock, roll out of bed, brush our teeth, grab our caffeine fix, eat our favorite breakfast meal and search various forms of media for insight on whether the financial markets are headed up or down. Over the last couple of weeks, the news has been quite mixed, leading to significant market swings. For example, a solid reading on consumer spending sent stocks higher, while a recent weak employment report led to a steep decline. While overnight and morning news offer market clues, many of us often get consumed in the single-issue story and forget to take a step back and compile the pluses and minuses that can push the financial market up and down. Instead of focusing on the news du jour, let's treat the financial markets as a company and analyze it using a balance-sheet approach.
A balance sheet is a financial statement that summarizes a company's assets and liabilities. If net assets exceed net liabilities, the company has positive overall net worth (known as positive shareholder's equity). If net assets do not exceed net liabilities, shareholder's equity is negative. Analysts and investors focus on balance sheets for indications about future growth prospects or possible trouble ahead. With the markets exhibiting significant volatility, instead of focusing on overnight news du jour, which has been the trend lately, let's apply a simple balance sheet approach to the financial markets and economy to get a more balanced picture of what lies ahead.
| “Assets” | | “Liabilities” | | | Low interest rate policy in U.S. | +1 | Higher energy prices | +1 | | Some stability reached in Europe | +1 | Washington: elections and the debt battle | +1 | | High corporate cash levels to fund M&A and dividends | +1 | Lingering European debt concerns | +1 | | Solid corporate earnings growth | +1 | Markets up double-digits already this year | +1 | | Corporations are leaner from recession driven cost-cutting | +1 | Some soft global economic data reports | +1 | | Improving or stable domestic economic data | +1 | Ongoing geo-political risks, most notably in the Middle East | +1 | | Stabilization in domestic housing market | +1 | Signs of recession in Europe and Japan | +1 | | Lending conditions improving for consumers | +1 | Mixed readings on a soft landing in China | +1 | | Household debt to consumer income is relatively low | +1 | | | | Equity market valuations not stretched | +1 | | |
In our opinion, this list of significant assets and liabilities for the economy and financial markets results in a "positive shareholders equity" of +2. If the economy and financial markets were an individual company, we might consider it to just be balancing its positives and negatives, though with a slightly positive tilt. Given this delicate balance between "assets" and "liabilities," instead of focusing on the complete economic and market picture, we continue to believe investors will remain reactionary to the daily news leading to significant market swings.
Looking forward, we would not invest too aggressively and we would keep equity exposure in line with investment objectives. To mitigate potential market volatility, we would also increase allocations to income solutions (such as corporate bonds and dividend paying stocks) and expand portfolio diversification through the use of alternative investment strategies. Because of their low correlation to traditional stocks and bonds, alternative investments may improve diversification. This information is compiled by Cetera Financial Group from source material obtained or provided by US federal and state departmental websites, equity index sponsors Standard & Poor's, Dow Jones, and NASDAQ, credit ratings agencies Standard & Poor's, Moody's Ratings, & Fitch Ratings, domestic and foreign corporate issued newswires and press statements, and from referenced compilations and index readings by Bloomberg Professional. The information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular news update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security covered in this material may not be advisable or suitable. Please consult your financial professional for more information.
While diversification may help reduce volatility and risk, it does not guarantee future performance. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.
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