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Does It Seem Like We've Been Here Before?

April 8, 2013

Are we experiencing deja vu all over again in global equity markets?
-Matt Freund, senior vice president of investment portfolio management, USAA Investments

Are we experiencing deja vu all over again in global equity markets? The start of this year has followed a similar pattern as the past three.

Previous years began with positive economic data and hope of a sustained recovery, followed by weakness in the spring months, usually caused by slowing domestic economic data and overseas shocks. Recent economic developments in the U.S. and Europe lead us to believe we may be heading down a familiar path.

After reaching all-time closing highs last week, the S&P 500 trended lower this week, closing at 1,553, down 0.98%. U.S. Treasury bonds continued to rally (prices go up when yields go down), as the 10-year Treasury yield declined 0.14 of a percentage point to 1.71%. Spot gold closed at $1,581, down 1.1% for the week.

Among the most significant news this week came from Japan as the new Bank of Japan governor surprised markets by announcing a new massive quantitative-easing program to boost the slumping Japanese economy. Japan is the newest member to arrive at the QE party and plans to make a bold entrance. The targeted balance-sheet expansion is expected to double the size of the Bank of Japan's balance sheet to more than 270 trillion yen by the end of 2014.

As a result, Japan's central bank balance-sheet size (as a percentage of nominal GDP) should significantly surpass those of the United Kingdom, Japan and the eurozone. Japanese equity markets rose more than 5% in local currency terms this week on the news. Additionally, the yen continues to weaken significantly relative to the U.S. dollar, which boosts Japanese exporters' competitiveness.

As we enter the second quarter, the effects of the fiscal-cliff tax hikes and sequestration on the U.S. economy should become clearer. Data released this week were not a positive sign. The closely followed U.S. payroll report showed that employment rose just 88,000 in March, well below consensus expectations of a 190,000 increase. The unemployment rate fell to 7.6%, but that figure reflected fewer workers looking for jobs. This report does not come as a complete surprise, however, as initial jobless claims now have risen over the past three weeks, signaling a potentially softening job market.

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