Tag Archives: recession

Global Markets Rally on News of US Budget Deal Shaping Up

Optimism prevailed on Wednesday on the world markets as news of an agreement to avoid the US ‘fiscal cliff’ reached investors. Political leaders in the US need to reach an agreement before January 1st, when across-the-board budget cuts and tax increases will go into effect automatically. Economists and other analysts fear that these automatic measures, which are in place to cut the US budget deficit, will send the US economy back into recession.

After lack of progress for weeks between Democratic and Republican lawmakers, several key players in the “fiscal cliff” negotiations have made moves towards a compromise, relieving the fear investors have had that a US recession was imminent, and sending global markets on a rally.

The FTSE 100 in Britain rose by 0.3 percent to 5,954.05. The DAX in Germany increased by 0.2 percent to 7,665.20. In France the CAC-40 rose by 0.3 percent to 3,659.05. Wall Street in New York will be well-placed to open higher, while Dow Jones industrial futures went up by 0.1 percent and S&P 500 futures rose slightly to 1,441.70.
 

Once Hot Utilities Stocks Losing Popularity

Just like everything else powered by the whims of crowds, types of stocks also have their “five minutes of fame.” Take, for instance, the coolness surrounding Chinese Internet stocks one month, solar energy manufacturers another month, or daily-deal sites like Groupon a third month.

Dust Off Grandma's Stocks

But who would have ever thought the boring, safe, old-fashioned, faithful utility stock would become the darling of 2011? Well maybe you grandmother, but regular investors? Yes they sure were popular last year; in fact, utility sector stocks were the be-all and end-all best-performing stock sector, up 8.7% overall in 2011, says the fund-tracking firm Lipper. We don’t have to tell you this was quite a bit better than the go-nowhere, do-nothing, S&P 500.

Proceed with Caution as Economy Recovers

But before you sell the farm and buy out the electric company, heed the warning that this unlikely hero has likely wilted back into the safe haven of slow growth, where it is usually found. Investors bestowed their beneficence on utility sector stocks because of their reputation for being safe and sound, but now their price to earnings ratio has gone a bit high; up to 14, well above the S&P’s average of 12.2, a warning to proceed with caution.

"Utilities stocks were red-hot, but the public needs to know the tide has turned against them," says Alec Young, global equity strategist for S&P Capital IQ. "It's an untold story, and there hasn't been enough coverage of it."

What makes Young say this? During recessions, such as the one we are hopefully emerging from, investors flee to utility stocks for their lovely mix of stability and yield. But as the economy recovers with decent GDP growth and jobless rates lowering, history has shown that counter-cyclical stocks like utilities tend to fall behind.

"The macro picture is improving, and we're past the point of maximum fear," says Young. "Now there will be less focus on yield and capital preservation, and more willingness to speculate. All of that is bad news for utilities."

Federal Reserve to Refrain from More Bond Buying

Two influential officials from the Federal Reserve announced on Friday that the central bank should wait before buying more bonds. In addition to cutting overnight interest rates down to nothing in December of 2008, the Federal Reserve also purchased $2.3 trillion worth of government and mortgage-related bonds to stimulate growth in response to the worst recession in dozens of years.

Economy Improving, Bond Buying Not Needed

The president of the Federal Reserve Bank in St. Louis, James Bullard told reporters after

James Bullard

a speech he gave in this Midwestern city that as long as the economy seems to be improving, the purchasing of more bonds should be postponed.

“The data has been stronger in recent weeks and months, and so I think there’s probably a good case to stand pat for now,” Bullard said.

“If the economy did deteriorate substantially in 2012, then I think (quantitative easing) would come back on the table, but that’s not where we are right now,” added Bullard, considered a centrist when it comes to policy debated by the Federal Reserve.

Upcoming Policy Meeting

The large variety of positions when it comes to Fed policy was apparent as the officials practiced their differing arguments in preparation for their upcoming policy meeting on January 24-25.

The aftermath of the meeting is expected to result in the announcement of more information about the direction interest rates will take in the near future, as well as an explicit number for an inflation target. It is not expected, however that the Feds will announce any new round of bond purchases.

Bond Buying on Hold, For Now

Some other Federal Reserve officials, including the influential president of the New York Fed, have hinted recently that additional bond buys might need to be considered sometime in the future, but for now Bullard’s position is probably the one which will be followed for now.