CHICAGO, IL--(Marketwire - Mar 18, 2013) -
- U.S. household purchases grow despite falling incomes
- Euro's decline is being felt globally
- U.S. equities fairly priced, stocks favored over bonds
Financial markets around the world may have their work cut out for them in 2013, yet it is already clear that this year will be one of rebuilding and refocusing, BMO Private Bank's April 2013 Outlook for Financial Markets report reveals.
Highlights from the report include:
U.S. Addresses Sequestration
With Fiscal Cliff talks off the table for the moment, the United States is in rebuilding mode thanks to spending cuts and tax increases geared at balancing the budget. Among the country's challenges and opportunities going forward:
- The government has invoked sequestration, a series of government spending cuts aimed to shave the federal budget by $85 million this year.
- Lighter paychecks and a two percent payroll tax increase are being felt by average Americans as well as by businesses ranging from retailers to restaurants.
- Household purchases grew 0.2 percent in January, with employment gains and demand for housing and cars helping to boost spending.
- Sales of existing homes expanded in January for the second straight month to bolster the housing market recovery, while low inventories of homes for sale combined with appealing interest rates have boosted the housing market.
"It will be interesting to see how sequestration plays out," said Jack Ablin, Chief Investment Officer, BMO Private Bank. "Cutting the $1 trillion annual budget deficit is a wise move to rationalize an unsustainable imbalance. But shorter term, spending cuts and tax increases could weigh on the recovery."
World Income Markets Still Struggling
According to the report, the Eurozone is not alone in its ongoing struggles, with Britain, German and Japan all facing their own issues so far this year:
- Eurozone unemployment is close to 27 percent in Greece and Spain, while France lost its triple-A bond rating late last year and may not hit its deficit reduction target this year.
- The United Kingdom also lost its triple-A rating, and Britain's debt as a percentage of Gross Domestic Product (GDP) is expected to climb to 98 percent next year - up eight percent from last year.
- Japan's new and aggressive monetary policy measures designed to stimulate the economy have pushed the yen lower and the Nikkei stock market index higher. In the first three months of 2013, the yen has declined more than 10 percent against the euro while the Nikkei has outpaced the German DAX by a similar margin.
- Germany's ability to sell within the Eurozone is limited while the robust euro is hindering all European countries' exporters.
"Eurozone equity markets will likely have a difficult time beating the S&P 500 in local currency without the help of a sliding Euro," said Ablin. "But just how low the euro falls will depend on policymakers' comfort with the prospect of heightened inflation."
Stock Market Has Winners and Losers
So far this year, healthcare and consumer staples are leading stock market gains, each advancing more than nine per cent for the year. Trailing the pack, though, are basic materials and technology. The report also notes that:
- The Dow Jones Industrial Average edged ever higher in February and on March 5 reached a new high of 14,253, while blue chips have picked up more than six percent and all 10 economic sector groups are participating.
- U.S. equities are fairly priced using traditional measures such as price-to-earnings and price-to-sales rations, though stocks look relatively inexpensive relative to opportunities in bonds.
- Commodities have flatlined in the last two quarters, and emerging foreign market equities are flat for the year.
Secular Shift Fuels Discussion
According to the report, investors are starting to wonder if the most recent doubling of the market since March 2009 represents a secular shift towards a long-term bull market. Yet history has shown that the shift from short-term fixes to the righting of long-term imbalances helps pave the way for a new secular trend.
"Now that the Dow and the S&P are within striking distance of their all-time highs, the question of whether or not this is a secular bull market is getting louder," said Ablin. "The U.S. is not yet ready for a secular shift to a long-term bull market phase. When most investors swear off the stock market, we may know that the seeds have been sown for structural reform and another secular bull market, one that delivers strong long-term returns and expanding price-earnings ratios for the next 15 to 20 years."
To view a copy of the report please visit: https://www.bmo.com/privatebank/us/insights/resources/newsletters.
About BMO Private Bank
BMO Private Bank offers a comprehensive range of wealth management services that include investment advisory, trust, banking and financial planning to meet the financial needs of high net worth clients. Through integrated teams of experienced financial professionals, BMO Private Bank helps its clients realize their financial and lifestyle goals with solutions that are custom tailored and delivered with the highest level of personalized service.
BMO Private Bank is a brand name used in the United States by BMO Harris Bank N.A. Member FDIC. Not all products and services are available in every state and/or location.
Investment products are NOT FDIC INSURED - MAY LOSE VALUE - CARRY NO BANK GUARANTEE.