Kicking off 2013 with Market Week in Review

Uploaded by RussellInvestments on 04.01.2013

bjbj Hi, thank you for joining us for Market Week in Review for the week ending January
4, 2013 coming to you from Russell s world headquarters here in Seattle, WA. I'm Mark
Soupiset and we re joined this week by Erik Ristuben. Erik, Happy New Year. Happy New
Year. Welcome back. Well, we started the year looming over the fiscal cliff and earlier
this week we did come to a resolution. Talk about your opinion of what did happen, what
didn't happen, and where we go from here. Yes. A resolution as such In the loosest term
possible. So here basically just a review. We ve been saying this for a while but it
s helpful to review. Our basic issue in the United States fiscally is that we spend 23%
of GDP at the Federal Government level and we take in 15%. How do you solve that problem?
Well, you change the lines so they actually intersect. The fact of the matter is that
means taxes are going up and spending is going to come down as a percentage of GDP. This
deal worked on half of that equation, it worked on the tax cut. Now what it did was extend
the Bush tax cuts for the vast majority of Americans. The only people left out in the
cold were individuals making over $400,000 and couples making over $450,000. So good.
Revenue numbers run up. But what they really did was kind of punted on how to get that
spending line a little more under control than it had been. So the next sort of looming
issue potentially is yet another debt ceiling debate or crisis potentially. Yes, and they
punted it about six weeks. So the debt ceiling, we re coming up, how we fund that gap, that
8% gap between revenues and spending is we borrow money. But we have a self-imposed limit
on how much money we can borrow and that s the debt ceiling and we re coming up awfully
close to that ceiling, it s expected by mid-February, early March we ll be through the debt ceiling
and we won't be able to borrow any more money, which then causes all the same falderal that
potentially was going to happen in July and August of 2011. So yes, we re basically gearing
up for a big debt ceiling debate. I think the fundamental issues of the debt ceiling
debate are going to be the same ones we talked about spending and taxes. And we do expect
them to come to some kind of a deal but we do expect kind of this spectacular political
theater that we ve seen basically for the last three years to continue. And maybe some
market fatigue if we keep going through these cycles of here we go again, we re getting
close to a crisis, hopefully we avert another crisis. Yes. I think it s important to note
thought that markets have reacted favorably to this deal. The certainty at least of some
deal. The Russell 1000 was up 4% on this trading week; the Stocks 50 was up 2% in Europe; in
Australia the S&P ASX was up a percent; in Canada the S&P TSX was up 1%. The other market
that really reacted to this news, which is something that you're not going to see a lot,
is the bond market. Treasury yields on a 10-year Treasury Note have actually moved up 23 basis
points since the end of last week. What that says is the bond market believes, in my mind,
that economic expansion or continued recovery is more likely than not and its beginning
to raise rates. Now that s about half of the rate rise we expect for all of 2013 we ve
already gotten pretty much in a week. The German bunds have done the same thing, which
I think is generally good news at least from the bonds market. Did we see any good news
in the jobs number that came out today? 155,000 US jobs created in December about what was
expected? Yes, pretty much what we had forecast and pretty much the consensus forecast on
the street. Good news, not great news, but good news in that it s confirming the fact
that the US economy, less the fiscal cliff (without the fiscal cliff), the US economy
as we ve been saying it seems very unlikely to go into recession anytime soon in this
continued expansion. Even with some fiscal contraction in 2013 because of the cliff,
we think that ll be offset by housing and we think the numbers are supporting that.
Erik I want to wrap up with a question out of Europe. We saw some Euro Zone manufacturing
numbers this week that weren t particularly good what does that tell you about what s
going on in that region and what should that tell investors about that region going forward
as we enter the new year? What it tells me and what it should tell investors is at the
end of last year we talked about the fact that European stocks, the Stocks 50, have
outperformed the Russell 1000 in the last five months of the year pretty significantly.
That doesn t mean that Europe doesn t have issues. One of the issues they have is they
are stuck in an economic environment that is very difficult to differentiate from a
recession, the Euro Zone manufacturing numbers you saw this week actually kind of reiterate
that, so it really continues to put the pressure on policymakers in Europe to balance the growth
and austerity seesaw that they ve been having to balance, just as we ve been having to balance
here in the States. And that is something that investors need to continue to look at.
We think it will work out constructively but the all-clear horn has not sounded on that
particular beach. Erik thanks as always for your insights, we appreciate it, and we appreciate
you joining us for the first Market Week in Review of 2013. We ll see you next week. FILENAME
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