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Vail Daily column: Greek credit fix boosts stock markets

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About this report

This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company. The company’s representatives in the Vail Valley are Ken Armstrong, Shane Fleury and Steve Shanley. To learn more, call 970-328-7526.

A Feb. 20 agreement between Greece and its creditors — seen variously as a short-term fix or capitulation by that nation’s new leadership — was still enough to send stocks here and across the Atlantic soaring. The Dow gained its first nominal high of the year, the S&P 500 posted its third in the past week, the NASDAQ closed in on 5,000 and Europe’s Stoxx 600 climbed to a seven-year peak.

Going into Feb. 20, the prospects for any agreement seemed slim, as the proposals offered by Greece’s leaders were rebuffed, and they were, in turn, given an ultimatum, which the Greeks all but dismissed. Nonetheless, after the third emergency meeting by the eurozone’s finance ministers in one week, an accord was reached. The four-month plan ensures that Greece will get the last tranche of its €240 billion ($273 billion) bailout to keep it solvent and, in return, Greece on Feb. 23 submitted a proposal detailing the austerity steps it will take to earn that money. However, the agreement states that Greece will “refrain from any rollback of measures” of the terms agreed to by previous governments or “unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability.”

As German Finance Minister Wolfgang Schäuble put it after the deal was announced, “Being in government is a date with reality, and reality is often not as nice as a dream.”

The problems, however, were myriad, including the fact that Greece will almost certainly still need money in four months and that the plan it submits might be rejected, especially after Greek Finance Minister Yanis Varoufakis quickly lapsed back into the pugnacious tone that had so annoyed the eurozone’s ministers, saying that Friday’s deal would be “dead and buried” if creditors didn’t accept Greece’s proposed plan.

Around the rest of the eurozone

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Elsewhere in Europe, there was cause for optimism at week’s end when a closely watched economic indicator, Markit’s composite purchasing managers’ index, came in at 53.5 in February, a seven-month high. But there was one more cloud hanging over the eurozone as Russia defied the recently brokered ceasefire with Ukraine by moving arms and troops across the border to aid the separatists. European leaders and President Obama threatened a new round of sanctions if the incursions continued. Meanwhile, because of the existing sanctions and the low price of oil, Moody’s downgraded Russia’s credit rating to junk.

The Fed remains “patient”

The minutes of the Fed’s most recent meeting Jan. 27 and 28 indicated that it will not be hasty in raising its benchmark rate, still concerned about the fragility of the economic revival and the specter of slow inflation. While some members felt the time had come to raise rates, a majority, including Chairwoman Janet Yellen, believed that acting too early “might dampen the apparent solid recovery” and were inclined “toward keeping the federal funds rate at its effective lower bound for a longer time.” The bond market staged a rally after the minutes were released, but it soon fizzled out, and yields rose as the week progressed. This week, Fed watchers will get a chance for further speculation when Ms. Yellen delivers her semiannual report to Congress.

Inflation slows

With the job market having rebounded, the Fed’s primary concern is inflation, and last week the producer price index took its biggest dip in more than five years because of lower gas prices, meaning the Fed could hold off longer than expected. The PPI fell 0.8 percent in January after decreasing 0.2 percent in December. Over the previous 12 months, prices were unchanged after being up 1.1 percent in December, the weakest year-over-year reading since the government began keeping track in 2010. Core prices, excluding food and energy, fell 0.1 percent after having risen 0.3 percent in December, and were up 1.6 percent over the past year compared to 2.1 percent the month before.

In other news, the Commerce Department said that housing starts fell 2 percent in January to an annualized rate of 1.07 million, but were up 18.7 percent from a year earlier. Building permits dipped 0.7 percent to 1.05 million, up 8.1 percent from January 2014. The National Association of Home Builders/Wells Fargo sentiment index fell to 55 in February from 57 in January. Manufacturing output rose 0.2 percent in January, the Fed reported, and was up 5.6 percent from a year earlier. Overall, industrial production increased 0.2 percent after having dropped 0.3 percent in December, and was up 4.8 percent from last January; capacity utilization was unchanged at 79.4 percent. Plus, first-time jobless claims fell 21,000 to 283,000, while the four-week moving average was down 6,500 to 282,250.

Japan underperforms

Japan’s government said that fourth-quarter GDP was 2.2 percent, an improvement after two quarters of contraction seen as the result of new sales taxes that came into effect last April, but well below the forecast of 3.7 percent.

Walmart and wages

Walmart, the nation’s largest private employer, raised its minimum wage to $9 an hour, a signal that the more competitive job market was forcing it to act or lose workers to competitors.

A look ahead

In addition to keeping an eye on Yellen’s trip to Capitol Hill, investors will weigh releases on existing, new and pending home sales, the S&P/Case-Shiller home price index, Markit’s services and composite PMIs, the consumer price index, durable and capital goods orders, and consumer confidence. The government will also release its first revision of fourth-quarter GDP, expected to fall from 2.6% to 2.1%, largely because of a wider trade gap.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Standard & Poor’s offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor’s and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.

The NASDAQ Composite Index® Stocks traded on the NASDAQ stock market are usually the smaller, more volatile corporations and include many start-up companies.

NASDAQ – National Association of Security Dealers Automated Quotations. The NASDAQ is a computer-operated system owned by the NASD that provides dealers with price quotations for over-the-counter stocks.

The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.


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