December 20, 2012
The Dow Jones Industrial Average
) and the broader S&P 500
) are up just more than a point each as of 10:10 a.m. EST.
In yesterday's column, "How to Invest in a Low-Growth World
," I warned about placing too much importance on GDP growth when selecting investments. This morning, I found an excellent illustration of this in the Financial Times
that I can't resist including today: "China's growth is still so strong, despite a slowdown, that it is effectively creating an economy the size of Greece's annual output every three months. But investors would have been much better off putting their money in the Athens stock market this year."
House Speaker John Boehner has taken a tangent in regard to the fiscal-cliff negotiations by bringing up the idea of a "plan B" that would focus on preventing a rise in taxes on all but those who earn more than $1 million annually. This looks to me like a ploy designed to deflect blame from the Republicans if both parties cannot reach a broader agreement by Jan. 1. In any event, President Obama is having none of it, immediately threatening to veto any such plan. By taking that option off the table, the President must be hoping to refocus the negotiations; he feels that an agreement is in sight and wants to keep the pressure on his opponents.
The macro view
Bondholders are warned. 2012 will have been a record year for bond issuance in the U.S., in both the investment-grade and high-yield sectors. Due to the Fed's zero-interest-rate policy and quantitative easing, government bond yields have been compressed to historic lows, which is creating a ravenous appetite for yield and, thus, the demand for corporate bonds. That demand, coupled with low benchmark yields, is producing lower and lower yields in the corporate sector. The yield on the Barclays US High-Yield Index hit an all-time low of 6.07% on Tuesday. Rating agency Fitch is warning that even moderate increases in rates could produce significant declines in bond prices. That's not a problem for investors who are prepared to hold bonds to maturity, but those who are taking a punt on further price gains with products like the SPDR Barclays High Yield Bond ETF
) should think twice.