A significant debt downgrade
· Greece’s debt woes intensified, with Standard & Poor’s lowering Greek debt to below investment grade—junk bond status—and investors worrying that the country would default on outstanding debt.
o At month-end, it looked as if the European Central Bank (ECB) would accept Greek bonds as collateral against ensuing loans, paving the way for a coordinated loan package led by Germany.
o Analysts believe that Greece may need to restructure its debt despite the assistance.
o Along with Greece, Portugal and Spain debt was downgraded.
· Eurozone credit woes could have widespread implications for financial markets.
o Global equity markets have seen sell-offs on Greek news.
o A demand for U.S. Treasury bonds has increased on a flight-to-quality trade.
o European banks, owning a considerable amount of the troubled debt, will likely feel the pressure of the dramatic drop in pricing.
§ Because Greek bonds have been downgraded to junk, some investors can no longer hold the debt.
o Many Europeans have been reluctant to bail out entities that have been imprudent in managing their financial affairs.
Equity markets fueled recently by strong earnings
· Equity markets continued to confound pundits by pushing higher, but renewed volatility in April’s last week of trading reminded investors that markets can go lower.
o We have seen several large moves to the downside recently.
· Earnings remained a strong catalyst for markets.
o Most companies beat analyst estimates, helping markets quickly recover from sell-offs.
o Industry estimates of $75 per share on the S&P 500 could be increased to around $80 for the year, signaling confidence in earnings strength for the remainder of 2010.
· Will markets continue to shrug off mixed global economic data and strengthen on strong earnings?
o The last week in April was a test, showing that markets could move lower after a long upward trend.
o The serious test will come in the second half of the year, when the impact of the stimulus begins to wane.
o We will find out whether the economy and the markets are ready to stand on their own two feet and deserve the higher valuations we have seen in recent trading.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.
Authored by Simon Heslop, CFA®, director of asset management, at Commonwealth Financial Network.
© 2010 Commonwealth Financial Network®
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