No one said it would be easy. Since the euro-zone crisis surfaced two years ago, European governments have been under pressure to rein in outsized budget deficits and bring their high public debt levels under control. Initially, smaller countries such as Greece, Portugal and Ireland bore the brunt of market scrutiny and were compelled to undertake draconian cutbacks in government spending.  Over the past year, sovereign debt of larger countries including Spain, Italy and France also came under market pressure, and the respective governments adopted austerity programs to assuage the markets.

It was widely expected that these policy measures would result in recession in the euro-zone, and the latest data confirm that ten member countries have experienced two consecutive quarters of negative growth. What is grabbing market attention now, however, are the deteriorating labor market conditions in many of these countries and the political backlash to the austerity programs: Core countries such as France and Holland have changed governments in the past couple of weeks, adding to the list of European governments that have fallen since the Great Recession.  Newly-elected French President Hollande, who is committed to the euro-zone, has stated that he will seek to renegotiate a fiscal pact with German Chancellor Merkel to make it more pro-growth. Read the rest of this entry »

After a period of unusual calm, financial markets have become more volatile of late in the wake of a disappointing March employment report and renewed tensions in Europe.  However, there is a prominent issue on the horizon that has not yet captured the markets’ attention — namely, the prospect of a $500 billion fiscal shock that could occur next year if Congress and the President do not alter scheduled tax hikes and spending cuts.

This issue is certain to attract investor interest as the November elections approach, as the outcome will have a critical bearing on the course that is pursued.  While we are not making any changes to our investment portfolios until the outcome is clearer, we are examining the most likely possibilities and assessing their implications. Read the rest of this entry »

One of the main issues confronting investors today is how to position portfolios when markets have been unusually favorable. The first quarter of 2012 proved to be an exceptionally strong one, with the S&P 500 index posting a total return of 12.6% while the Nasdaq Composite index registered a 19% return. These results represent the strongest first quarter showing since 1998 (S&P500) and 1991 (Nasdaq), respectively. At the same time, investment-grade and high yield corporate bonds generated solid returns of 2.0% and 5.0%, respectively, while U.S. treasuries were down by 1.3%.

These developments surprised most investors, especially those who feared the turmoil of 2011 would spill over into 2012. And many are wondering how long the increased appetite for risk assets will last.  Read the article here

Euro-zone Tensions Resurface: A Case of Spanish Flu

Highlights

• After several months of relative calm, financial markets have turned volatile recently amid renewed tensions in the euro-zone, with Spain as the focal point: 10-year Spanish government bond yields, for example, recently surged by nearly  a full percentage point to almost 6.0%, which sent tremors throughout world capital markets.
• Investor worries reflect a reassessment about the effectiveness of the European Central Bank’s Long-Term. Refinancing Operation (LTRO) and Spain’s ability to rein in its budget deficit when it is in recession.
• While there is some validity to these concerns, the situation in the euro-zone is not as dire as it was last year. First, the ECB under Mario Draghi has demonstrated a commitment to deal with the financial crisis. Second, the Spanish Government is much more credible than Greece’s.
• Accordingly, while the period of market calm may be over, I do not anticipate a return to the crisis atmosphere of last fall. Read the rest of this entry »

I just returned from a conference of the American Council of Life Insurers for CIOs and CFOs, where the above topic loomed large on the agenda.  Virtually all of the attendees believed today’s record low interest-rate environment poses a major challenge for life insurance companies and other financial institutions, because it contributes to margin compression, which hurts overall profitability.  And while debt service burdens of households and the federal government are being alleviated by low rates, many participants were concerned that the Federal Reserve’s policies were creating distortions in capital markets that could backfire at some point. Read the rest of this entry »

The European debt crisis indeed could cloud the economic picture for the U.S. and the rest of the world in the coming year, said a previous top official of the International Monetary Fund. But despite the risks, John Lipsky told the audience at the Fort Washington Investment Advisors 2012 Investment Forum that he believes the recovery is on the right track and that European officials are taking the right course.

“There are grounds for optimism,” Lipsky said.

Lipsky said that ongoing efforts overseas should help limit the impact of the European debt crisis on the U.S. – which should see a return to a 2-3% growth rate in the next two years.  Read John’s Article Here

Watch the video of former Managing Director of the IMF, John Lipsky, from Fort Washington’s Investment Forum.

Overall Economic and Investing Climate

The overall economic and investing climate should continue to recover in 2012, with growth rates possibly recovering to their pre-recession rates. That should give investors a sense of “cautious optimism” as they determine their strategies for the coming year.

That was the overriding message delivered by Nicholas P. Sargen, Chief Investment officer for Fort Washington Investment Advisors at the firm’s 2012 Investment Forum.

The U.S. economy will recover to a growth rate of between 2-3 % – where it has traditionally been on average for most of the last 70 years, Sargen predicted.

“We are starting to get closer to the old normal,” Sargen told the crowd of more than 250 investors. “Are we home free? No … but the underlying story, I contend, is better than most people currently acknowledge.”  Read the article here

Despite the economic turmoil of 2011, a number of investment strategies at Fort Washington Investment Advisors did quite well. And with the outlook for a more stable year in 2012, firm officials are optimistic over the next 12-14 months but indicate that investors must be “nimble” and willing to adapt to changing conditions on the fly.

“No question there is a lot of negativity out there,” said John J. O’Connor, Managing Director and Equity Strategist at Fort Washington. “It has sapped investors’ natural optimism, because you have to be somewhat of an optimist to be an investor.”

“That negativity doesn’t have to be. There are some good investments out there. The pendulum of greed vs. fear had clearly swung toward safety last year, but now it is starting to swing back, meaning good things for investors” according to O’Connor.  Read the article here

 Highlights

• Equities and other risk assets are off to a strong start in 2012 owing to improved U.S. economic performance, accommodative monetary policies in the U.S. and Europe, and diminished fears about a European financial crisis. Amid these developments, treasury yields have fluctuated in narrow ranges while credit spreads have compressed.
• We have been trading treasuries actively in bond portfolios in this context, while maintaining overweight positions in High Yield and CMBS.  Looking ahead, there is a risk treasury yields could break out to the upside, especially if the Fed embarks on a third round of quantitative easing. Rising oil prices and uncertainty about the U.S. election are also likely to add to overall volatility in financial markets.

2012 Surprises

The ability of markets to confound investors should not be underestimated.  For example, the prevailing view at the beginning of this year was that financial markets would continue to be highly volatile.  Several factors were commonly cited to support this view including ongoing tensions in the euro-zone as the region slipped back into recession, a projected slowdown in China’s robust economy, and lackluster growth in the U.S. Read the rest of this entry »