US markets were down last week on slowing global growth figures and additional European sovereign debt debates. In the US, housing figures took a step backwards last week, the national unemployment rate ROSE to 8.2% and the 1st quarter US GDP report had a downward revision to 1.9%.
Until recently, the global economic situation has been a tale of two stories, with the US continually displaying signs of slow/steady growth while the Euro Zone countries were mostly in recession. This past week saw a “change in the tide” as US economic figures took a turn for the worse.
In Europe the fiscal crisis continues. European leaders are trying to agree on the terms for a larger scale bailout of the Euro Zone countries but most plans default to Germany paying for the bulk of the bailout. Obviously Germany is not excited about the prospect of bailing out their fiscally irresponsible neighbors and therefore has been declining most of the bailout terms. This has led many experts to consider the possibility that Germany could leave the Euro entirely and return to the mark. Thankfully most of the progress (both positive and negative) in the Euro Zone has been slow and steady. Therefore, markets have had the opportunity to “price in” the risks associated with the Euro Zone. Markets tend to react most severly to unexpected news (like the failure of Lehman a few years ago).
The US economy showed signs of slowing for the first time last week. On Tuesday the Case Shiller home price index hit a new post-2008 low, signaling that national home prices have dropped again. Many analysts were hoping that US home prices had already hit a bottom but this indicated something different.
With all of the global economic uncertainty, most foreign investments are seeking “safety”. Therefore US treasuries and German bonds have been continuing to attract more foreign investments because of their perceived safety. US treasuries hit their all-time low last Wednesday while German bonds currently sit with an almost 0% yield.
On Thursday of last week news broke that there would be a downward revision of the US 1st quarter GDP figures from 2.1% as originally projected to 1.9%. The biggest reasons cited for the revision were a drop in consumption, bigger trade gaps than originally anticipated and more cutbacks in government spending and employment.
The final negative US economic report came on Friday of last week as the May jobs figures were presented. Experts had projected an increase of 158,000 new jobs in May but were surprised to discover that they had over-projected as only 69,000 new jobs were actually created. As expected, the figures showed that the private sector continued to add jobs in May while state and local governments continued to downsize. This news came along with an announcement that the national unemployment rate rose from 8.1% to 8.2%.
HOWEVER, on a more positive note, cash reserves of US corporations and private equity firms continues to RISE. Some of the latest estimates show over a $2 trillion combined reserve. This bodes well for future growth prospects as US corporations and private equity firms will not sit on cash forever and would rather have that money working.
Also, as a reminder, we have redesigned our website at www.klaasfinancial.com. If clients have any difficulty accessing their portfolio reports, please give our office a call at 815-877-8440 or 608-442-5637.
* This is for illustrative purposes only and is not indicative of any investments. Investment value will fluctuate with market conditions. Past performance is no guarantee of future results.
(Sources: finance.yahoo.com, www.bloomberg.com, Investors Business Daily, www.economy.com, www.newyorkfed.com, www.mworld.com, www.htrnews.com, www.wsj.com)
