Thomas D.D. Graff, CFA Fixed Income Portfolio Manager
With the release of the minutes of the December Federal Open Market Committee (FOMC) meeting on Tuesday, December 13, the Federal Reserve announced that it would be making changes in how it communicates the Committee’s collective thinking. Brown Advisory believes that this is a significant development, with serious long-term and short-term implications.
The Strategic Advisory Team
With the enactment of tax legislation at the end of 2010, the federal government extended favorable tax laws for 2011 and 2012, but we believe this extension of lower income tax rates—and modifications to the transfer tax system—will be temporary. Therefore, we recommend that clients consider the opportunities currently available in this low tax environment.
On December 5, Standard and Poor’s (S&P) put 15 European sovereign credit ratings on negative watch, citing in part deteriorating budget conditions, anemic economic growth and a lack of political will to deal with these problems. This echoed S&P’s explanation given for downgrading the U.S. in August. More disturbing has been the sharp rise in Italian bond yields. Italian 5-year bond yields were under 3% as recently as November 2010, under 4% as recently as June 2011. Then with frightening speed, yields suddenly spiked, trading as high as 7.75% in November. More disturbing was a lack of any specific catalyst for the spike. There was no Greek-like revelation of a big hole in their budget or some sort of political unrest. It was basically just an erosion of confidence that became self-feeding. This has American investors asking, could the same thing happen here?
Paul Chew, CFA Head of Investments
Into the breach they go. Despite concerted efforts, Greece’s experiment with the euro zone stands perilously on the brink of collapse. On October 1, Greece released its draft budget for 2012 which outlined measures to rein in the country’s unsustainable public finances. On October 3, markets ostensibly dismissed deficit reduction plans and focused on the government’s admission that it will adjust its 2011 deficit projection upwards. US equity markets followed Europe, closing sharply lower. The S&P dropped below 1,100 for the first time in more than a year. Policy makers are running out of time as tension over the debt predicament continues to mount. Credit default swap spreads on Greek sovereign debt, a measure of how costly it is to buy insurance against their default, are at an all-time high (see chart). As of October 3, it costs 5,391 basis points or 53.91% per year to insure Greek bonds from default.
William L. Paternotte, CFA Strategic Advisor and Partner
In addition to football, the thing we most associate with autumn is elections. And as the multi-sided Republican debates constantly remind us, next year’s Presidential election is just around the corner. To an even greater degree than normal, that election is likely to revolve around the economy. With the lackluster recovery in danger of slipping into a double-dip recession, politicians are once again joining economists and investors in debating the ways to stimulate growth and restore America’s economic leadership. The key to growth and the election is jobs.