The U.S. stock market is clearly becoming riskier, in our view, because stock prices have been in a rising trend at the same time that the economy and earnings have been decelerating.
-John Kvantas, executive director of discretionary money management, USAA Investments
Worldwide stock markets took a tumble earlier this week, spurred on by election results in Italy, combined with relatively soft economic releases and little sign of compromise in Washington regarding budget sequestration. However, Fed Chairman Ben Bernanke's congressional testimony reaffirming that quantitative easing would continue for as far as the eye can see halted the downdraft and spurred a rally.
After the dust settled, the S&P 500 index ended the week almost unchanged, up 0.22% at 1,518, although the rest of the world was down modestly on average. U.S. Treasury bonds rallied, with the yield on the 10-year dropping 0.12 percentage points to close at a 1.84% yield. Spot gold was off 0.33% to close at $1,576 an ounce.
The eurozone crisis appears to be heating up again, with a failed election in Italy that was unable to produce a clear winning party. The Italian people appear to be rejecting recent fiscal austerity measures, and there is even talk of a national vote to decide whether or not the country should remain in the European currency union. Italian government bonds tumbled on the news (prices down, yields up), with the yield on the 10-year jumping 0.36 percentage points on the week to close at 4.80%.
Weak economic news added to renewed European fears. This included a contractionary 47.9 reading on the February Eurozone Purchasing Managers Index, an uptick in the eurozone unemployment rate to 11.9%, and a downgrade in the United Kingdom's coveted AAA bond rating to Aa1 by Moody's.
Back at home, there was a negative unexpected surprise Friday that U.S. personal income declined by 3.6% in January, more than expected. And although the U.S. economy, as measured by gross domestic product, was revised upward for the fourth quarter of 2012, growth struggled at an anemic annual rate of only 1.0% before inflation adjustments and a mere 0.1% after inflation. The U.S. economy has clearly decelerated during the past several months, as have corporate earnings.