Tug of War

This week saw a tug of war between worry of debt levels in the European Union on one side against corporate earnings and the Federal Reserve on the other side. This newsletter will give the weekly recap from Vanguard and more on this tug of war and what it means.

Vanguard Weekly Recap:

The U.S. economy continued to expand during the first three months of the year, according to the latest gross domestic product reading. Consumer confidence and employer costs also showed signs of slow, steady growth. Still, the Federal Open Market Committee announced that its target for short-term interest rates will remain unchanged for the foreseeable future. For the week ended April 30, the S&P 500 Index fell 2.5% to 1,187 (for a year-to-date total return of about 7.1%). The yield of the 10-year U.S. Treasury note fell 15 basis points to 3.69% (for a year-to-date increase of 16 basis points).

Tug of War:

Going into the week the mood on Wall Street was upbeat with people predicting sunny skies ahead. Early in the week, concerns with the debt level in Europe became the top story and storm clouds rolled in. Let's go through what this is and its meaning.

Portugal, Ireland, Italy, Greece, and Spain (PIIGS) have high debt levels relative to the economic output of their respective country as measured by GDP. The reason that they got into this mess is because the people acted like PIGS doing what was good for now and forgetting about later and later finally arrived. The bonds issued by Greece was downgraded which means that the interest rate rose because of a higher risk of default, meaning the citizens have to pay more to cover the higher interest charges. This downgrade lowered the stock markets around the world because Greece, and the rest of the PIIGS in the near future, would now have to pay more money in taxes to meet the bond obligations hurting their economic growth.

On the other side corporate earnings continue to come in above expectation with most companies talking about economic growth in the next quarter. While this is going on, the Federal Reserve has stated that short term interest rates are staying low to continue to help the economy grow. We are talking about economic growth in our country.

So what does this mean? While the US does have a higher amount of debt than I would like we are no where near the level of the PIIGS. It is good to observe what happens and learn that we NEVER want to be in the same situation as the PIIGS. We are experiencing economic growth and the Federal Reserve will continue to provide fuel with low interest rates. The sunny skies of corporate earnings and the Federal Reserve are much brighter than the dark clouds of the PIIGS.

The bottom line: We are staying with the current investment strategy. Relax and enjoy the good things of life.