The Positive and Negative Tug of War Continues

Portfolio Manager Market Notes


We continue to play the waiting game. The market remains range bound so we’re looking for signs of break out one way or another before making a move. As long as we’re in the range, getting a little more defensive or a little more aggressive here won’t have a significant impact.


Opposing forces are still at work.


Positives = U.S. recession is unlikely due to improving economic data, attractive valuations in certain asset classes, election next year may help ease some of the divisiveness we’re currently seeing, etc.


Negatives = Eurozone. The market is still held captive by headlines coming out of Europe. Once these issues are resolved, the opportunity could potentially be tremendous and very lucrative but we have to get through the tunnel first in order to get closer to the light. As a result, we remain neutral with our positioning.


Markets
The broad indexes ended higher for the week as optimism about a resolution to the European debt crisis waxed, waned, and then waxed again. Stocks rallied on Monday in response to reports that the leaders of France and Germany had agreed on the outlines of new rules that would allow tighter integration of European economies. As an important meeting of European leaders in Brussels approached on Friday, however, investors grew increasingly concerned that the latest rescue plan would once again prove insufficient.


In particular, worries mounted that the European Central Bank (ECB) would not broaden its role in boosting banks and providing liquidity. Markets tumbled on Thursday afternoon, following a warning from the ECB’s new president, Mario Draghi, that the bank’s willingness to absorb member government debt was “neither infinite nor eternal.” Investors were also discouraged by rumors that Germany would oppose key parts of the agreement being negotiated in Brussels. The week ended on an encouraging note, however, as word arrived that an all-night negotiating session had resulted in a plan to grant the European Court of Justice unprecedented authority to overrule national laws within the 17-member Eurozone that did not result in minimal deficit spending. Yields on Spanish and Italian debt rose somewhat following the announcement, suggesting skepticism that the new spending laws would rectify past imbalances. Still, markets rallied to end the week as equity investors appeared to welcome signs of renewed unity within Europe, as well the allocation of additional resources to the Continent’s rescue fund. A rise in a gauge of U.S. consumer sentiment to a six-month high may have also boosted investors’ outlook. (Source: T. Rowe Price)


Technical Outlook
Market continues to be confounding and vacillating between the upper and lower boundaries of the trading range resulting in continued market volatility. Very frustrating to say the least for managers and investors alike. Headlines continue to dominate and will probably maintain that dominance until the situation in Euroland resolves one way or the other. U.S. markets are still looking better than their International counterparts and defensive plays look better than riskier areas of the market. Really no change over the last few weeks – patience remains the key.