After the “risk on” environment to start the year pushed risk assets sharply higher, we experienced a pull-back in the second quarter. The deepening crisis in the Eurozone and evidence of slower global growth weighed on the global financial markets and drove investors to the relative safety of the U.S. government bond markets.
Some positive factors remain, but the macro risks continue to dominate. We expect
continued sluggish growth in the U.S. because of ongoing deleveraging, regulatory
uncertainty and the looming fiscal cliff in 2013. While U.S. corporations are in good
shape with strong earnings and high levels of cash on their balance sheets, they are hesitant to put it to work because of the uncertain environment. We still lack sustained growth in real personal incomes, which is key to greater levels of consumption and stronger economic growth going forward. While the Federal Reserve remains accommodative and stands ready to act further, the effectiveness of their monetary policy tools is diminishing.
The Eurozone has begun to take steps toward addressing their sovereign debt crisis, but more needs to be done. Policymakers must also contend with a deepening recession in the region, which will send debt/GDP ratios even higher. The need for a bailout of Spanish banks prompted leaders to announce somewhat more aggressive measures at their recent summit. It remains unclear whether these policy options will actually be put into place; however, it appears that Europe is beginning to lay out a path forward, which is a positive.
While growth in developed markets is weak, growth in emerging markets has also slowed. Investors continue to watch China’s actions to see whether a hard landing can be averted. One positive corollary of a slowdown in global growth is receding inflationary pressures and lower commodity prices. Lower retail gas prices are a boost to the disposable incomes of consumers.
The unresolved macro risks will keep the markets susceptible to bouts of volatility as we enter the second half of the year. The U.S. Presidential election will likely add to that volatility. Because of massive government intervention in the global financial markets, we will continue to be susceptible to event risk.
Amy Magnotta, Portfolio Manager
Brinker Capital Inc., a Registered Investment Advisor