APCM: Central banks save the month for the markets

Just when things looked a bit grim for the month, central banks swooped in and initiated a global easing of policy by providing more liquidity to European banks. I guess if the politicians can’t agree it’s reassuring to know that at least the central bankers are on the same page.

Stocks soared on the last day of the month bringing the return of the S&P 500 to minus 0.2 percent for November and a positive 1.08 percent year to date. It wasn’t enough to help the overseas equity markets though. EAFE developed country markets lost 4.9 percent, while emerging markets were off 6.7 percent last month.

The Barclay’s U.S. Aggregate Bond Index was flat for the month. Ten-year treasuries ended the period yielding 2.07 percent.

The Bank Credit Analyst opined that the “coordinated move by seven major central banks, including the cut to the reserve requirement ratio by the People’s Bank of China, represents a significant step on the road toward global reflation.” Let’s hope so, but don’t count on a Santa Clause rally.

The situation in Europe continues to grab the headlines with various plans under consideration, but little confidence that they will work. The crisis has moved to Italy where their 10-year sovereign debt yields have soared to over 7 percent. A Dec. 9 European Union summit may shed more light on all of this.

Action by central banks was welcome but it may also point to just how significant the freeze-up in European interbank lending has become. In fact, it’s worth noting that S&P downgraded 37 major banks late last month.

On the home front, the economy has steadied itself after a shaky summer. Real GDP gained 2 percent in Q3 but is expected to be up 3.0 percent in Q4. There are some hints that housing may be bottoming. And, if holiday sales so far are a guide, consumers appear to be back shopping again. Corporate earnings have been terrific all year.

The unemployment rate dropped to 8.6 percent, but job creation remains sluggish. Only 120,000 net new jobs were created in November. A U.S. double dip recession is off the table but European growth looks to be as slow as molasses.

I remember this Shakespeare quote from high school:

Life is but a walking shadow, a poor player

That struts and frets his hour upon the stage

And then is heard no more: it is a tale

Told by an idiot, full of sound and fury,

Signifying nothing 

Little did I know that the Bard was foreshadowing the failure of the “bipartisan” super committee to reduce the budget deficit! The Republicans are stuck on no new taxes and the President now has his campaign issue – a do nothing congress. Let the 2012 election jousting begin.

Actually the markets had expected this but it was still disappointing. I suppose hope springs eternal – at least for the incurable optimists among us. The next big issue to be resolved by year end is extension of the payroll tax holiday and emergency unemployment benefits that were initiated last year.

J.P. Morgan economist David Kelly says that absent this extension we risk shrinking the deficit too fast! He has a point. The drag on the economy from the resulting drop in government spending would be significant and probably not a good idea given the fragility of the economy.

I hope everyone has a wonderful holiday season.

Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management, a $2 billion investment management and advisory firm located Anchorage.

12/15/2011 - 10:18am