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Ameriprise Financial, Inc. : Cracks in the Argument

04/09/2012 | 05:48pm US/Eastern
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The weaker-than-anticipated March employment report has managed to remove the almost-dashed hopes for QE3 from life support. Earlier in the week, in the minutes of its March meeting which the Fed released on Tuesday, it had upgraded its assessment of the strength of the recovery, citing improved labor market conditions among other factors, and implied that economic momentum would have to slow to make another round of stimulus a realistic possibility. The yield on the ten-year U.S. Treasury note immediately jumped from 2.18 to 2.30 percent.

That rate spike had been all but eliminated by Thursday in light of equity market weakness and renewed fears of debt problems in Europe, focused primarily on Spain. But it was the release of the March jobs report on Friday that drove the yield all the way down to 2.06 percent, and managed once again to raise the possibility that another round of quantitative easing remained on the table, especially given the Fed's dual mandate to maximize employment consistent with stable prices and its apparent belief that the recent pace of improvement in labor markets is likely to slow. Instead of creating 205,000 new non-farm jobs as had been expected, the economy added just 120,000. As a result, the three month average pace of job gains fell from 246,000 to 212,000. And although that pace is still respectable, it does raise questions about the sustainability of the early spring pace of hiring and the distorting effects of unseasonably warm temperatures across much of the country.

Following the jobs report the dollar softened, reversing a three day rising trend that came after the release of the Fed's minutes. And gold firmed after losing three percent of its value in the previous three trading sessions. Nor was the suddenly renewed interest in bonds hurt by weakness in equity markets. Although closed for Good Friday and, therefore, unable to fully reflect the jobs report until Monday, stocks had nevertheless been weak enough on Wednesday and Thursday to result in the worst weekly performance of the new year, as the S&P 500 closed at 1398, down 0.7 percent. And although that decline is certainly modest, the index has now been treading water for the past three weeks since it closed at 1404 on March 16.

Stocks in the Eurozone fared far worse last week, dropping 5.0 percent, and are down by just over 8 percent in the past three weeks. Spain endured a weak debt auction and saw the yield on its ten-year note rise 40 basis points from the prior week's close to 5.74 percent. Just five weeks ago its yield was 4.85 percent. Emerging market equities were also a little softer last week, falling 0.5 percent. But emerging markets now have fallen in each of the past three weeks and in four of the past five for a cumulative decline of 4.0 percent. Overall, the MSCI All-Country World Index dropped 1.6 percent last week and is unchanged in the past seven weeks.

Clearly, a degree of reassessment of the underlying assumptions surrounding this year's, until recently uninterrupted, equity rise is underway. What had become something of a one-way bet on improving economic data, stability in the Eurozone's debt crisis, and ever rising equity prices is suddenly being reconsidered in view of a few cracks in the argument. A continued period of market consolidation, or a more meaningful price correction, now seems like a higher percentage possibility. But as we and others have been saying for some time, a pullback after such an extended period of strength should not be unexpected, especially in an economic and political environment as uncertain as this. However, even should that occur it would not necessarily mean the end of the rally. Events and economic data will determine that. As will earnings.

First quarter earnings season officially begins on Tuesday and will give equity investors plenty of questions to ponder-among them, not only how strong was the first quarter, but what kind of visibility is there for the rest of the year? And, how certain can any forecast really be in view of the looming presidential election? But if the recent pattern persists, the market will be more discriminating than earlier in the rally, rewarding strong performers who deliver confident guidance, and punishing those who miss estimates and offer cloudy forecasts.

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.

MSCI-All Country World Ex. U.S. Index: Is an unmanaged index representing 48 developed and emerging markets around the world that collectively comprise virtually all of the foreign equity stock markets.

It is not possible to invest directly in an index.

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.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC. Some products and services may not be available in all jurisdictions or to all clients.

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