Work left to be done on fiscal cliff

Big Picture

Work left to be done on fiscal cliff; Fed split on bond buying; China rebounding

The last-minute resolution to avert the fiscal cliff was welcomed by investors around the world but the cheering may not last long. To get the deal done a number of loose ends were left untied including tough decisions on spending cuts and an agreement on the debt limit. Both issues loom in the weeks ahead and a repeat of the political brinksmanship demonstrated over the past two months may further undermine consumer and business confidence.

Meantime, news of splits among US Fed officials on the duration of its current bond-buying program took investors by surprise Thursday. The divisions were disclosed in minutes from the Fed’s Dec. 11-12 meeting. Some officials want to continue the bond buying through 2013; others would like to see it end sooner while still others would like to halt the program right away. The Fed recently tied the length of its bond-buying program to unemployment saying it wanted to see the jobs picture improve “substantially”; unemployment stood at 7.8% in November and December’s number, released today, remained unchanged.

In China, the country’s manufacturing activity hit a 19-month high in December as a closely watched purchasing managers index rose for the second consecutive month. The back-to-back increases snap 12 successive months of contraction. The country’s strengthening manufacturing sector and higher electrical usage rates have spurred optimism that China is bouncing back after last year’s slump.

Markets

All green for major North American stock benchmarks in 2012

After closing out the year on a strong note due to fiscal-cliff optimism, stocks took off during the first trading day of the new year on news a deal had been reached. For the holiday-shortened three-day period the Dow steamed ahead by 453 pts. to end Thursday at 13,391, the S&P 500 jumped 56 pts. to end at 1,459 and Nasdaq rose 152 pts. to 3,112. In Canada, the TSX moved higher 154 pts. to close at 12,470. For the year, the TSX ended up 4%, the Dow 7.3%, the S&P 500 13.4%, and NASDAQ 15.9%.

Our Recommendation

Macro data supports expectations for equity out-performance

• Equities - Himalaya Jain, Director, Portfolio Advisory Group (PAG) wrote: “Stronger economic data is likely to result in upward revisions to corporate earnings in the second half of 2013. A diversion of funds from fixed income into equities could also result in multiple expansions.  Our preference is for equities over bonds and cyclicals over defensive stocks.  Given our constructive view toward the US economy, we recommend increased exposure to US equities. 

• Fixed income - Andrew Mystic, Associate Director, PAG, suggests “given the Bank of Canada’s recent tone, investors should begin to re-evaluate the duration of their portfolios - particularly given the relatively low rate environment and its potential impact on value if rates reverse course. Term Call – we no longer see value in the mid-to-long end of the curve and recommend investors stay short at this time. Sector Call – underweight Canada, overweight Municipals, Provincials and Corporates. Currency Call – we recommend Canadian investors remain in Canadian dollars for their fixed income holdings. Alternative Strategies – marketweight high yield, marketweight Emerging Markets Debt, underweight inflation protected debt.”

• Portfolio strategy - Scotiabank GBM Portfolio Strategist Vincent Delisle says: “Our game plan for 2013 is to be positioned for pro-growth conditions in the first half. However, we will remain heavily focused on our tactical indicators as we believe range-bound market conditions will linger on.”

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This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.