Europe Struggles; the Fed Extends Bond-Buying Program

Europe’s debt problems continued to dominate the business headlines in June - the only change being the shift of attention from Greece to Spain, where struggling banks and high bond yields have mired the country in economic crisis. Before the next  eurozone summit (scheduled for June 28-29) got rolling, commentators were expressing little hope that the meetings would make major progress in resolving the  eurozone debt crisis. German Chancellor Angela Merkel had reached agreement earlier with leaders from Spain, Italy and France on a package totaling 130 billion euros to restore growth but continued to resist the struggling nations’ requests for a more flexible rescue plan. The anticipated absence of Greece’s senior ministers from the June summit (due to illness) was an added complication. A summit spokesperson noted that, under such circumstances, no decisions would be made onGreece’s situation.  

The consensus seems to be that a major meltdown in the eurozone can be averted, but it will take some time to build a new, workable euro framework. In the meantime, European investors are looking for safe havens such as U.S. Treasuries, though some experts note that popular assets like Treasury bonds, gold and German bonds already are priced high by historical standards.

Amid the bad news from Europe, it is easy to overlook positive U.S. business news. Bright spots include an upswing in corporate profit margins and a boost in consumer spending. Some brokers believe that theU.S.market has yet to recoup its full value since its low point during the recession and urge investors to stay the course. Others are suggesting that individual investors take a look at the technology and telecommunications sectors. Large-cap stocks and dividend-paying stocks remain popular choices, too. Dividend-yielding equities are traditionally less volatile than the broader equity market. For those who are not risk-adverse, some brokers are researching long-term positions in emerging markets that have been disproportionately affected by current market weaknesses.

Also on the domestic front, the Federal Reserve ended weeks of speculation by announcing it would extend its bond-buying program known as Operation Twist through the end of 2012. This program involves exchanging shorter-term securities in the Fed’s portfolio for longer-term Treasury bonds. The purpose of the $267 billion extension is to help lower long-term interest rates, which in turn encourages borrowing and helps boost the housing sector and other markets. This move should reduce yields on longer-term Treasuries by a small amount, but most experts don’t believe it will have much real impact on individual investors’ portfolios. Some believe the extension will boost investor confidence in the stock market, though others note that traders had expected this level of involvement from the Fed and that any resulting rally will probably be short-lived.

Some market pros regard the Fed’s promise to take further action if employment figures decline as perhaps the more significant move. Fed Chairman Bernanke also noted that the Fed was prepared to introduce a third round of quantitative easing – large-scale asset purchases – if weaker job growth and slower spending begin to hamper present growth. The Fed monitors these numbers very closely.

The commentary above is general in nature and is not intended to replace the advice of professional tax and investment advisors.

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