Market Watch: US and European Economies

market watch commentary

Investors continue to follow the markets with eyes wide open. One eye is focused on Europe, where leaders of the European Union try and cobble together a comprehensive plan to contain rising sovereign debt costs in its weaker economies, deal with a restructuring of Greek debt and fortify the banking system.

By Wasif Latif, Vice President, Equity Investments

The other eye is watching the U.S. economy as it continues its slow but stubborn growth, proving wrong the predictions of a double-dip recession.

European leaders continued their marathon discussions this week, but little in the way of formal announcements emerged. Speculation is building regarding the size of the haircut needed to be taken by the bondholders of Greek government debt (60%), the amount of cash needed to bolster various financial rescue facilities ($1-2 trillion Euro),and steps taken to increase capital in the European banking system. This process is incredibly complicated, and we expect it may take months to come to full agreement.

This week’s economic indicators supported our thesis of a slow-growing U.S. economy with inflation on the rise. September industrial production was up 0.2%, in line with consensus. Housing starts of 658,000 for September, while higher than expected, remain at a very low level. The index of leading indicators for September were 0.2%, the fifth consecutive month of increase, signaling expected growth in the economy for the next few quarters. The Consumer Price Index for Urban Consumers increased in September, and is up 3.9% on a year-over-year basis, the highest rate of inflation we have experienced in three years. While inflation as measured by the CPI could slow some in the next few months, we remain watchful for a rise over the long-term, given the unprecedented expansion of currency in the U.S. and elsewhere in the world.

The S&P 500 index gained 1.14% on the week to close at 1,238.25, its highest close since early August. Treasury bonds were mixed, with the 10-year closing the week at a 2.22% yield, down 0.03% in yield from last week. Gold closed at $1642.38/oz., down 2.28% from last week.

Corporate earnings season is starting, with the early results once again on the positive side. Notable upside surprises this week were reported by Citigroup,Bank of America, Southwest Airlines, American Express and Intel. This was partially offset by misses from Goldman Sachs and Wynn Resorts. Next week’s notable releases should include, Lockheed Martin, Exxon Mobil, Merck, and Visa.

This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance is no guarantee of future results. Investing in securities products involves risk, including possible loss of principal. Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. As interest rates rise, existing bond prices fall. Precious metals and minerals is a volatile asset class and is subject to additional risks, such as currency fluctuation, market liquidity, political instability and increased price volatility. It may be more volatile than other asset classes that diversify across many industries and companies. The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange. Indexes are unmanaged and you cannot invest directly in an index. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.


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