Sellwood’s review of 2012’s third quarter is available for download.
Third Quarter 2012: Fed and ECB Keep Risk Switch in “On” Position
US stock markets ended the quarter near all-time highs. The Dow Jones Industrial Average closed the quarter at 13,427, just a few hundred points below its historic high of 14,164, set in 2007. The S&P 500 Index closed the quarter at 1,441. US companies paid out a record $34 billion in dividends in August.
US corporate profits remain similarly elevated, although their pace of growth is slowing. Global economic activity also slowed during the quarter.
Investors, frustrated by low interest rates on high credit quality instruments and mistrust of an elevated stock market, possessed an insatiable appetite for yield. Issuers are meeting demand with supply. In mid-September, homebuilder D.R. Horton issued $350 million of bonds at a yield of 4.375%, the lowest ever for a 10-year “high-yield” (fka “junk”) issuer in the US.
The US Federal Reserve and the European Central Bank continued to signal support for weary global economies in the quarter. In the US, the Fed announced its QE3 program, designed to lower interest rates and keep asset prices high. The ECB announced a bond-buying program, lessening the risk of systemic collapse, and has pledged further support, though details remain elusive.
The debt crisis in Europe remains unresolved, and European economies, for the most part, continue to stagnate. Still, European stock markets continued to climb in the quarter. The German benchmark DAX Index has risen 22% in the year to date. French, Belgian, Italian, Irish, Dutch, and even Greek stock markets are positive for the year. Among the so-called “PIIGS,” only Spanish sovereign yields are higher today than they were a year ago – but they are still much lower than earlier in the quarter. The Spanish 10-year peaked above 7.5% in late July, and at quarter’s end yielded 5.97%; Germany’s 10-year bond closed the quarter yielding 1.46%.
Risks on the horizon: the US presidential election; the “fiscal cliff”; European solvency; valuations.