Waiting on a deal from Washington

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11/27/2012|  David Joy

The economic calendar this week is full of significant data releases that would normally be the focus of investor attention. Durable goods orders, the S&P/Case-Shiller Home Price index, consumer confidence, new home sales, pending home sales, the Beige Book, Q3 GDP revision, initial jobless claims, personal income and spending, the PCE deflator, and the Chicago PMI are all scheduled for release. But with the exception of the GDP report, which is expected to be revised up sharply to 2.8 percent from the 2.0 percent advance report, unless there are major surprises the rest of these reports will likely be met with a shrug.

The ongoing talks between Greece and the Troika will provide some diversion as well. But approval of the next round of financing is widely expected. Greek ten-year bond yields have fallen to 16.20 percent, their lowest level since August 2011. On March 1 of this year they were 30.59 percent, and as recently as July 24, when the ECB promised to defend the Eurozone, the yield was 26.90 percent. Clearly, Greece's problems persist. Differences among the IMF, EU, and ECB concerning further debt forgiveness have caused the latest round of talks to stall. But, the perception of risk regarding Greek solvency has diminished.

The real focus of investor attention this week will continue to be the fiscal cliff discussions in Washington. Apparently little progress was made between staffers last week in the opening round of talks. Talks at the staff level resume this week, in part designed to outline an agenda for the next round of leadership discussions, originally intended to take place this week but which has not yet been scheduled. There are just 34 days left in the year.

Stocks rallied sharply last week, reversing most of the decline from the prior two weeks. The S&P 500 climbed 3.6 percent in the holiday shortened week, its best performance since the first week of June. In the process, it moved back above its 200 day moving average of 1383, after reaching it on November 8 for the first time since June 1. There was good news on housing and holiday shopping, as well as some general comments from President Obama that the fiscal cliff will be avoided. But there was nothing on that front that would suggest a sustainable move higher for equities. That will have to wait for tangible progress on the fiscal cliff. At least as measured by the VIX index, volatility has remained subdued. 

In the meantime, bonds seem mostly unfazed by the political wrangling. Ten-year Treasury yields have hovered around 1.65 percent for past few weeks after spiking above 1.80 percent in mid-October. But there has been no wholesale flight to safety that would push yields even lower. And the yield-to-maturity of the BofA Merrill Lynch High Yield index fell 15 basis points last week after rising 37 in the previous four weeks.

All of which suggests a general complacency that a deal to avert the fiscal cliff will happen. And that is probably the most likely outcome. But it would be nice to see some real progress. And so we wait.

Important Disclosures:

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

Bank of America/Merrill Lynch  High Yield Master II is an index of high-yield corporate bonds which measures the broad high yield market.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

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Waiting on a deal from Washington

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