Now Available

Q4 2009 Quarterly Commentary

Download PDF: 150 KB

 Printable Page |  Email this Page

Weekly Economic Commentary

On the Other Hand Weekly Economic Commentary February 22, 2010 – February 26, 2010 By Bob Baur and the Principal Global Investors Economic Committee. Download this issue (PDF: 132 KB)   Archives

The Winter Lull in Equity Performance
A Transition to Expansion
The Fourth Quarter Got Better
Shoptimism Still Going
Indexes at a Glance

The Winter Lull in Equity Performance

Fears of Apocalypse during the depths of the financial crisis were rampant, and the correction earlier this year rekindled concerns the crisis would return. This market drop likely stemmed from several sources. The immediate trigger for a downturn was the announcement in China on January 20 of a second increase in the bank reserve requirement ratio. Chinese officials taking their collective foot off the monetary accelerator was a reminder that the massive monetary stimulus and trillions of dollars in global liquidity provided to markets during the financial crisis would have to be taken away at some point. And equity markets seldom perform well in a period of monetary tightening.

The second reason for investor wariness was the developing budget problems in Club Med countries. Greece first owned up to large errors in government accounting of expenditures and revenues last October. Since then, premiums on credit default swaps for Greek debt has soared, spreads between yields on Greek and German sovereign bonds surged, rating agencies downgraded Greek government debt, and investors began to question the ability of the government to bring its budget under control. Equity markets reacted to the fear of contagion, creating yet another financial crisis, this time in sovereign bonds.

Also in January, Ben Bernanke's reconfirmation as Fed Chairman originally appeared to be in trouble; he was viewed as too closely tied to the bank bailouts that were now suddenly perceived to be the main source of voter anger. The anti-big business, anti-profit, anti-bailout political rhetoric heated up several notches. But words mean things, rhetoric has consequences, markets began to notice change in tone, and the correction intensified.  On January 29, however, Bernanke indeed was confirmed as Fed Chairman.

A Transition to Expansion

While those three worries were surely behind some part of the decline, we think a more important factor was the natural ebb and flow of markets as the rally since last March began to mature. Equity leadership had been transitioning from high-beta, early cyclical companies highly sensitive to the economy to those with more stable earnings or that pay dividends, that do well when the momentum of the industrial cycle peaks.

Return to top

The Fourth Quarter Got Better

As measured by real gross domestic product (GDP), the U.S. recovery, which started in the third quarter of last year, became even stronger last quarter. The U.S. economy expanded at a 5.9% annual rate, a little faster than the 5.7% initially reported (a complete set of economic data including GDP projections is included in the attached tables). The rise in GDP exceeded most forecasts and was the best economic quarter in six years. The primary driver was inventories, which added almost 4.0% to growth as businesses liquidated $122 billion less in inventories than in the third quarter. Inventories still fell, just at a much slower pace; this should set the stage for a modest inventory build this quarter led by autos and capital goods such as construction equipment. The recession-spurred inventory liquidation was truly massive, stretching over eight quarters and topping $160 billion in last year's second quarter, putting the economy-wide ratio of inventory to final sales at the lowest since the Bureau of Economic Analysis began keeping records.

Shoptimism Still Going

Consumers are still spending and at a modestly increasing pace. Spending rose for the second straight quarter, up 1.7%, a little less than the initially reported 2.0%. Assuming further growth in personal income and an improving labor market, we expect consumer spending to continue its modest growth throughout the year, with an increase of 1.8% for all of 2010 after a -0.6% fall in 2009. It appears that residential construction will increase this year, although from very, very low levels. We expect housing to grow 4.1% this year following the horrible slump of the last two years, down -22.9% in 2008 and -20.4% in 2009. Low interest rates, rising household net worth, lower leverage, record home affordability, and rising employment are all supportive of a better housing market. But housing is still a very weak economic link and the huge number of mortgage delinquencies and distressed loans is still a large drag on sales of both new and existing homes. Until the supply overhang clears, the pace of new home building will be slower than many forecasters expect, despite the very low level of new home starts. We expect housing starts to rise by 17.1% this year and by 23.1% in 2011; that sounds great except that new home starts will still average only 800,000 in 2011, a very modest number compared to a peak of starts over 2,000,000 during the housing boom.

Return to top

Indexes at a Glance

Information provided by Principal Global Investors.

Performance of indexes reflects the unmanaged result for the market segment the selected index represents. The index is not available for direct investment.

Return to top

The commentary represents the opinions of Principal Global Investors and may not come to pass.

The S&P 500 is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market.

The S&P MidCap 400 Index includes approximately 10% of the capitalization of U.S. equity securities.
These are comprised of stocks in the middle capitalization range.

The S&P SmallCap 600 Index is a small-cap index that consists of 600 domestic stocks chosen for market size, liquidity, and industry group representation.

The Dow Jones Industrial Average is an index of 30 blue-chip U.S. stocks.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada.

The NASDAQ Composite Index is a broad-based index that measures all NASDAQ domestic and international based common type stocks listed on the NASDAQ Stock Market.

Before investing in a mutual fund or separate account, you should carefully consider the investment products' investment objectives, risks, charges, and expenses. Contact your financial professional, visit www.principalfunds.com, or call 1.800.222.5852 to obtain a prospectus containing this and other information. Read the prospectus carefully before investing.

A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

Securities mentioned are for illustration purposes only and do not constitute an offer to buy, hold or sell any security product.

Securities are offered through Princor Financial Services Corporation, 1.800.547.7754, member SIPC and/or independent broker dealers. Securities sold by a Princor Registered Representative are offered through Princor^®. Princor is a member of the Principal Financial Group^®, Des Moines, IA 50392.

Insurance products and plan administrative services are provided by Principal Life Insurance Company.

t1003030381

To obtain a prospectus, download online or call Customer Service at 1.800.222.5852

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that The Principal^® is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. For more information about our funds, including their full names, please see the Principal Funds, Inc. prospectus or call Customer Service at 1.800.222.5852.

A mutual fund's share price and investment return will vary with market conditions, and the principal value of an investment when you sell your shares may be more or less than the original cost.

This Web site was created and is maintained by Principal Funds Distributor, Inc. exclusively, and not by the Directors of the funds.

Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc., member of the Principal Financial Group^®. Principal Funds Distributor, Principal Shareholder Services, Principal Management Corporation and its affiliates, and Principal Funds, Inc. are collectively referred to as Principal Funds.

Not FDIC or NCUA/NCUSIF insured - May lose value - No bank guarantee - Not a deposit - Not insured by any federal government agency