Much of February was relatively quiet, but there were a couple of hiccups that caused minor concerns during the month, including a growing division inside the Federal Reserve over monetary policy and events in Europe.  Still, stocks did advance, and the Dow Jones Industrial Average ended the month at 14,054.49, just a stone’s throw from the all-time closing high reached on October 9, 2007 of 14,164.53 (St. Louis Fed).

Italy crashes the party

The first event that caused waves was the February 24-25 elections in Italy. Probably the best that could have been hoped for was a victory by a center-left/centrist coalition that would likely continue to implement the reforms and austerity crafted by former Italian Prime Minister Mario Monti.  Instead, there was no clear-cut winner, and the possibility of a deadlock and new elections unnerved credit markets in Europe and temporarily sent investors out of U.S. stocks and into the safety of Treasuries.

Discord surfaces at the Fed

At least for now, Italy ended up being a one-day event after reassuring comments from Fed Chairman Ben Bernanke on February 26-27th and upbeat economic data. Before providing some context, let’s review the Fed’s minutes from the January 29-30th meeting, which were released February 20.

First of all, it’s important to reiterate that the Fed’s extensive bond-buying program – popularly called quantitative easing (QE) – is controversial. Detractors believe it is doing little to help the economy and could have unintended longer term consequences, including higher inflation and destabilizing asset bubbles.  Supporters believe it has helped the housing market, consumer spending, and business spending, which in turn has assisted job creation. Still, even the most ardent proponent would not argue that Fed policy alone is the antidote to a recovery that has been sluggish by historical standards.

What they both do agree on – low interest rates have been beneficial to stocks and are a factor in the recent upward move.  Remember, the Fed’s goal is to stoke economic activity.

Budget cuts

The threat of sequestration has had no discernible impact on stocks so far. According to the bipartisan Congressional Budget Office’s Budget and Economic Outlook, cuts in fiscal year 2013 will amount to $42 billion, about half the $85 billion being bantered in the media. But $42 billion is just 0.25% of the total size of the U.S. economy, probably explaining the lack of concern we’ve seen so far in stocks. Over 10 years, spending would be reduced by $995 billion if there are no changes in the current plan.

Drivers feel the pain at the pump

Equities faced few headwinds from the spike in gasoline prices, but drivers are feeling the pain, with the regular gasoline rising an average of 47 cents per gallon to $3.78 in the week ended Feb 25, 2013. In fact, gasoline prices have never been higher this early in the year.  If there’s any good news, retail price increases have slowed, and wholesale gasoline, based on the April wholesale futures contract (CME Group), ended the month at $3.11/gallon, down from a peak of $3.32 reached at mid-month.

Looking ahead

There is the distinct possibility that Italians may have to return to the polls if a government cannot be formed. The uncertainty created by the election shaved 216 points off the Dow on February 25th

(MarketWatch) and the flight to safer assets helped knock 0.09 percentage points off the 10-year Treasury (U.S. Treasury), which ended February at 1.88%.  Turbulence in European credit markets has affected stocks at home before, and the potential for additional uncertainty looms.

The next date to keep an eye on is March 27. That’s when all non-essential services will shut down unless Congress passes a new bill to fund the government. Expect lots of give and take, but at this time odds favor some type of agreement.

2012 Tax Information:

We want to be sure you are aware that the 2012 tax information for your account(s) at the Trust Company of America (TCA) is available to you online.  You can login to your view your account(s) and under the “About My Account” tab is a section titled “Tax Documents”.  The form 1099 can be downloaded and/or printed, but you should have also received a hard copy of your tax information in the mail by now.  Under the same “Tax Documents” section is a “CSV FILE” (Excel) which can be downloaded directly into TurboTax or provided to your tax preparer so they can directly download the transactions for your taxable account(s).  Many CPAs that have already been provided this information have been thankful for this convenience. We would encourage all of you to utilize this when appropriate. In addition, you should have also received a 1099 from National Financial Services (NFS) as well.  As always, please CALL US if you have any questions.  We are here to help!