March Madness in International Markets

Summit Brokerage Weekly Economic UpdateAround the world, March often brings with it inflection points, a changing of seasons, and a variety of momentous events.  Every March across the U.S., college basketball fans gear up to watch and celebrate the tournaments that will culminate in the NCAA Division I Men’s and Women’s Basketball Championships.  This media spectacle, dubbed “NCAA March Madness” in the U.S., draws millions of viewers and dominates water cooler conversation for weeks.  By contrast, in Canada, “March Madness” refers to the budget flush that occurs in the last month of the government’s fiscal year ending March 31st, in which departments traditionally scramble to spend the remainder of their budgets to avoid having their following year budgets reduced.  In Europe, March Madness refers to the most active part of the European hare’s prolonged mating season, which lasts from January to August.

March has historically been a month of heightened market activity and emotional frenzy in the global markets as well. Case in point, the NASDAQ Composite hit its peak in March 2000. The broad market bottomed in March 2009, and the NASDAQ recently topped 5000 again.  Already, the first two weeks have seen a hotly debated employment report, Dow component AT&T (T) being replaced by Apple (AAPL), and the kickoff for the European Central Bank’s new government bond buying program, also referred to as quantitative easing.  Looking ahead, the Fed is scheduled to meet the week of March 16th, and investors eagerly wait to see if the Board of Governors thinks the economy is strong enough to remove the term “patient” from its policy guidance.  All of these events have ramifications which may influence markets going forward in different ways.

The U.S. unemployment report, in addition to a desirably low unemployment number, also conveyed a lower number of full time jobs in the U.S. than in February 2008, despite an overall increase in population. This gave some a cause for optimism that the labor market is finding a foundation, while it gave others reason for caution that the labor market is still fragile and may be affected by low oil prices.  For Apple (AAPL), heretofore a behemoth growth stock, being inducted in to the Dow 30 may be interpreted as an acknowledgement that the days of big growth may be behind us.  As the largest company in the world, this is not surprising, but as a former driver of index returns, investors may struggle to replace Apple’s historic growth in their portfolios.  The likely divergence of central bank policy as Europe launches quantitative easing and the U.S plans to unwind theirs, is likely to spur market activity in the sovereign bond market with yields in Europe declining, and yields on U.S. Treasuries increasing, at a faster pace once anticipated events come to fruition.  Moreover, because an increase in rates would reflect perceived strength in the U.S. economy, domestic stocks may initially see an increase in confidence while the removal of some equity risk in Europe may propel European stocks out of the doldrums.  However, the strong dollar byproduct created by European quantitative easing will be a significant headwind for many large global companies, and has contributed to the recent uptick in market volatility.  In short, many unknowns remain about the strength of the U.S. recovery, the stability of the various economies in Europe, and the geopolitical risks throughout the world which may cause further investor frenzy and market volatility.

Overall, we remain cautiously optimistic about the Eurozone region, its investor-friendly ECB, improving fundamentals and new quantitative easing program.  We also recognize that emerging markets cannot be painted with a broad brush and are optimistic that amidst the turmoil, there will be many investment opportunities in emerging markets that are less affected by what happens in the U.S. and in Europe.  As widely different as the interpretations of “March Madness” may be around the world, so may be the effects of the events highlighted in this commentary, among others.  With that said, we continue to stress diversification in portfolios, including an allocation to international investments.  Moreover, given our cautious optimism about Europe, within an international allocation, we would slightly tilt toward this region.


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